[Federal Register: June 9, 2003 (Volume 68, Number 110)]
[Rules and Regulations]
[Page 34293-34299]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09jn03-5]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9059]
RIN 1545-AX18
Coordination of Sections 755 and 1060; Allocation of Basis
Adjustments Among Partnership Assets and Application of the Residual
Method to Certain Partnership Transactions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
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SUMMARY: This document finalizes regulations relating to the allocation
of basis adjustments among partnership assets under section 755. The
regulations are necessary to implement section 1060, which applies the
residual method to certain partnership transactions.
DATES: These regulations are effective June 9, 2003.
FOR FURTHER INFORMATION CONTACT: Craig Gerson, (202) 622-3050 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to 26 CFR part 1 under section
755 of the Internal Revenue Code (Code). On April 5, 2000, a notice of
proposed rulemaking (REG-107872-99, 2000-1 C.B. 911) under section 755
was published in the Federal Register (65 FR 17829). Only one
commentator submitted written comments in response to the notice of
proposed rulemaking, and no public hearing was requested or held. After
consideration of the comment, the proposed regulations are adopted as
revised by this Treasury decision.
Explanation of Revisions and Summary of Contents
1. Summary
Section 743(b) provides for an optional adjustment to the basis of
partnership property following certain transfers of partnership
interests. The amount of the basis adjustment is the difference between
the transferee's basis in the partnership interest and the transferee's
share of the partnership's basis in the partnership's assets. Once the
amount of the basis adjustment is determined, it is allocated among the
partnership's individual assets pursuant to section 755.
[[Page 34294]]
On December 14, 1999, final regulations (TD 8847; 1999-2 C.B. 701)
were published in the Federal Register under section 755 (64 FR 69903).
Under these regulations, basis adjustments under section 743(b) are
allocated among a partnership's assets as follows. First, the
adjustment is allocated between the two classes of property described
in section 755(b). These classes of property consist of capital assets
and section 1231(b) property (capital gain property), and any other
property of the partnership (ordinary income property). The amount of a
basis adjustment under section 743(b) that is allocated to the class of
ordinary income property is equal to the total amount of income, gain,
or loss that would be allocated to the transferee from the sale of all
ordinary income property. The amount of the basis adjustment under
section 743(b) that is allocated to capital gain property is the total
amount of the basis adjustment under section 743(b) less the amount of
the basis adjustment allocated to ordinary income property. The basis
adjustment is then allocated to individual assets within each class.
The final regulations issued on December 14, 1999, worked in
conjunction with Sec. 1.755-2T. In the case of a basis adjustment
under section 743(b) or section 732(d), the fair market values of all
assets other than goodwill or going concern value were determined on
the basis of all the facts and circumstances, and the fair market value
of goodwill and going concern value was determined using the residual
method. As described more fully in the notice of proposed rulemaking,
Sec. 1.755-2T was published prior to the enactment of section 1060(d),
which (as amended in 1993) requires the residual method to be applied
for purposes of determining the values of section 197 intangibles for
purposes of applying section 755. These final regulations implement
section 1060(d) and replace Sec. 1.755-2T.
These final regulations differ from Sec. 1.755-2T by using the
residual method to value all section 197 intangibles (not just goodwill
and going concern value). In addition, these final regulations also
apply to basis adjustments under section 734(b) and contain special
rules for certain substituted basis transactions. Finally, for
convenience, the provisions of the regulations have been relocated to
the beginning of Sec. 1.755-1.
Under these final regulations, a partnership is required to assign
values to its assets as follows. First, the partnership must determine
the values of each of its assets other than section 197 intangibles
under all the facts and circumstances, taking into account section
7701(g) (treating the fair market value of a property as not less than
the amount of any nonrecourse indebtedness to which the property is
subject). The partnership then must determine the gross value of all
partnership assets (partnership gross value). Last, the partnership is
required to use the residual method to assign values to the
partnership's section 197 intangibles. For purposes of these
regulations, the term section 197 intangibles includes all section 197
intangibles (as defined in section 197), as well as any goodwill or
going concern value that would not qualify as a section 197 intangible
under section 197.
If the aggregate value of partnership property other than section
197 intangibles is equal to or greater than partnership gross value,
then all section 197 intangibles are deemed to have a value of zero. In
all other cases, the aggregate value of the partnership's section 197
intangibles (the residual section 197 intangibles value) is deemed to
equal the excess of partnership gross value over the aggregate value of
partnership property other than section 197 intangibles. The residual
section 197 intangibles value must be allocated, first, among section
197 intangibles other than goodwill and going concern value. Any
remaining value is assigned to goodwill and going concern value.
The proposed regulations used the residual method to assign values
to all partnership assets, rather than limiting the scope of the
residual method to section 197 intangibles. Treasury and the IRS have
concluded that these rules were unduly complex, especially when they
applied to partnerships whose partnership agreements contained special
allocations of partnership income or loss. Accordingly, the final
regulations utilize the residual method only to value section 197
intangibles.
2. Transactions Subject to the Regulations
Because the proposed regulations used the residual method to value
all partnership assets (and not just section 197 intangibles), it was
desirable for all partnerships to value their assets using the same
method. Accordingly, under the authority of sections 1060(d) and 755,
the proposed regulations applied to all partnerships, whether or not
their assets constituted a trade or business. In contrast, the final
regulations apply the residual method only for the purpose of valuing
section 197 intangibles, which are usually held by partnerships whose
assets constitute a trade or business. Thus, the final regulations
apply the residual method only to partnerships whose assets constitute
a trade or business (as described in Sec. 1.1060-1(b)(2)).
The proposed regulations specifically applied to basis adjustments
under section 732(d). Some references to section 732(d) have been
removed in the final regulations to enhance readability. Nevertheless,
the final regulations continue to apply to basis adjustments under
section 732(d).
3. Methods for Determining Partnership Gross Value
If a partnership interest is transferred in a taxable transaction,
the transferee's basis in its partnership interest provides a frame of
reference for determining partnership gross value. In these
transactions, both the proposed and the final regulations generally
provide that partnership gross value is the amount that, if assigned to
all partnership property, would result in a liquidating distribution to
the transferee partner equal to that partner's basis (reduced by the
amount, if any, of such basis that is attributable to partnership
liabilities) in the transferred partnership interest immediately
following the relevant transfer.
In certain circumstances involving basis adjustments under section
743(b), such as where income or loss with respect to particular section
197 intangibles is allocated differently among partners, partnership
gross value may vary depending on the fair market values of particular
section 197 intangibles held by the partnership. In these situations,
the final regulations require the partnership to use a reasonable
method, consistent with the purposes of the final regulations, to
determine partnership gross value.
In the preamble to the proposed regulations, the IRS and the
Treasury Department requested comments regarding how the residual
method applies in the context of a basis adjustment that results from
an exchange of a partnership interest in which the transferee's basis
in the interest is determined in whole or in part by reference to the
transferor's basis in the interest (a transferred basis exchange).
Determining partnership gross value in such an exchange is problematic,
because the transferee's basis in the partnership interest does not
necessarily have any connection to the fair market values of
partnership assets. No comments were received regarding the specific
method to be adopted by the final regulations.
The IRS and the Treasury Department also requested comments
regarding how the residual method applies in the context of basis
adjustments under section 734(b). One commentator
[[Page 34295]]
suggested that the final regulations should require one method for
valuing partnership assets in the case of a pro rata distribution, and
another method for valuing partnership assets in the case of a non-pro
rata distribution. The IRS and the Treasury Department believe that
this approach would be unnecessarily complex.
The final regulations adopt a single method for determining
partnership gross value that applies to all section 734(b) basis
adjustments and to section 743(b) basis adjustments resulting from
transferred basis exchanges. In these circumstances, partnership gross
value is the value of the entire partnership as a going concern,
increased by the amount of partnership liabilities. In the case of a
basis adjustment under section 734(b), the value of the entire
partnership as a going concern is determined immediately after the
distribution causing the adjustment.
A commentator has suggested that the same method for determining
partnership gross value should apply to exchanged basis transactions,
such as the distribution of a partnership interest by a partnership.
The final regulations adopt this comment by replacing all references to
transferred basis exchanges with references to substituted basis
transactions. Conforming adjustments are also made to the special rules
contained in Sec. 1.755-1(b)(5) for allocating basis adjustments under
section 743(b) among a partnership's assets in these exchanges.
4. Transferors of Partnership Interests
In the preamble to the proposed regulations, comments were
requested as to whether the residual method should be used to determine
the fair market values of partnership assets for purposes of applying
section 1(h)(6)(B) (collectibles gain or loss), section 1(h)(7)
(section 1250 capital gain), and section 751(a) (ordinary income) to
the sale or other disposition of a partnership interest. No comments
were received on this issue. Treasury and the IRS have determined that
the potential benefits of a rule allowing transferors to use the
residual method do not justify the increased complexity that the rule
would have created.
5. Other Changes
The final regulations add two clarifying rules for allocating basis
adjustments under section 743(b) among a partnership's assets in the
case of a transaction that is not a substituted basis transaction. The
first rule provides that assets with respect to which the transferee
partner has no interest in income, gain, losses, or deductions are not
taken into account in allocating basis adjustments to capital assets.
The second rule provides that in no event may the amount of any
decrease in basis allocated to an item of capital gain property exceed
the partnership's adjusted basis in that item. If the amount of a
decrease in basis otherwise allocable to a particular capital asset
exceeds the partnership's adjusted basis in that asset, the
transferee's negative basis adjustment in that asset is limited to the
partnership's adjusted basis in that asset, and the excess must be
applied to reduce the remaining basis, if any, of other capital gain
assets pro rata in proportion to the partnership's adjusted bases in
such assets.
Effective Date
These regulations apply to transfers of partnership interests and
distributions of property from partnerships that occur on or after June
9, 2003.
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. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations, and because the
regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Internal Revenue 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 businesses.
Drafting Information
The principal author of these regulations is Craig Gerson of the
Office of the Associate Chief Counsel (Passthroughs and Special
Industries). However, personnel from other offices of the IRS and the
Treasury Department participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding an
entry to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Section 1.755-2 also issued under 26 U.S.C. 755 and 26 U.S.C. 1060.
* * *
0
Par. 2. Section 1.755-1 is amended as follows:
0
1. Paragraph (a) is revised.
0
2.-3. A paragraph heading is added for paragraph (b)(1)(i).
0
4. The first two sentences of paragraph (b)(1)(i) are revised.
0
5. Paragraph (b)(3)(iii) is redesignated as paragraph (b)(3)(iv).
0
6. New paragraph (b)(3)(iii) is added.
0
7. In paragraph (b)(4)(ii), the Example is revised.
0
8. The paragraph heading for paragraph (b)(5) is revised.
0
9. Paragraph (b)(5)(i) is revised.
0
10. In paragraph (b)(5)(iv) Example 1, the last sentence is amended by
removing the language ``transferred basis exchange'' and adding
``substituted basis transaction'' in its place.
0
11. In paragraph (b)(5)(iv) Example 2, paragraph (iii), the third
sentence is amended by adding the language ``this'' before the language
``paragraph (b)(5)''.
0
12. In paragraph (c)(5) Example (i) introductory text is revised.
0
13. Paragraph (d) is revised.
0
14. Paragraph (e) is added.
0
The revisions and additions read as follows:
Sec. 1.755-1 Rules for allocation of basis.
(a) In general--(1) Scope. This section provides rules for
allocating basis adjustments under sections 743(b) and 734(b) among
partnership property. If there is a basis adjustment to which this
section applies, the basis adjustment is allocated among the
partnership's assets as follows. First, the partnership must determine
the value of each of its assets under paragraphs (a)(2) through (5) of
this section. Second, the basis adjustment is allocated between the two
classes of property described in section 755(b). These classes of
property consist of capital assets and section 1231(b) property
(capital gain property), and any other property of the partnership
(ordinary income property). For purposes of this section, properties
and potential gain treated as unrealized receivables under section
751(c) and the regulations thereunder shall be treated as separate
assets that are ordinary income property. Third, the portion of the
basis adjustment allocated to each class is allocated among the items
within the class. Basis adjustments under section 743(b) are allocated
[[Page 34296]]
among partnership assets under paragraph (b) of this section. Basis
adjustments under section 734(b) are allocated among partnership assets
under paragraph (c) of this section.
(2) Coordination of sections 755 and 1060. If there is a basis
adjustment to which this section applies, and the assets of the
partnership constitute a trade or business (as described in Sec.
1.1060-1(b)(2)), then the partnership is required to use the residual
method to assign values to the partnership's section 197 intangibles.
To do so, the partnership must, first, determine the value of
partnership assets other than section 197 intangibles under paragraph
(a)(3) of this section. The partnership then must determine partnership
gross value under paragraph (a)(4) of this section. Last, the
partnership must assign values to the partnership's section 197
intangibles under paragraph (a)(5) of this section. For purposes of
this section, the term section 197 intangibles includes all section 197
intangibles (as defined in section 197), as well as any goodwill or
going concern value that would not qualify as a section 197 intangible
under section 197.
(3) Values of properties other than section 197 intangibles. For
purposes of this section, the fair market value of each item of
partnership property other than section 197 intangibles shall be
determined on the basis of all the facts and circumstances, taking into
account section 7701(g).
(4) Partnership gross value--(i) Basis adjustments under section
743(b)--(A) In general. Except as provided in paragraph (a)(4)(ii) of
this section, in the case of a basis adjustment under section 743(b),
partnership gross value generally is equal to the amount that, if
assigned to all partnership property, would result in a liquidating
distribution to the partner equal to the transferee's basis in the
transferred partnership interest immediately following the relevant
transfer (reduced by the amount, if any, of such basis that is
attributable to partnership liabilities).
(B) Special situations. In certain circumstances, such as where
income or loss with respect to particular section 197 intangibles are
allocated differently among partners, partnership gross value may vary
depending on the values of particular section 197 intangibles held by
the partnership. In these special situations, the partnership must
assign value, first, among section 197 intangibles (other than goodwill
and going concern value) in a reasonable manner that is consistent with
the ordering rule in paragraph (a)(5) of this section and would cause
the appropriate liquidating distribution under paragraph (a)(4)(i)(A)
of this section. If the actual fair market values, determined on the
basis of all the facts and circumstances, of all section 197
intangibles (other than goodwill and going concern value) is not
sufficient to cause the appropriate liquidating distribution, then the
fair market value of goodwill and going concern value shall be presumed
to equal an amount that if assigned to goodwill and going concern value
would cause the appropriate liquidating distribution.
(C) Income in respect of a decedent. Solely for the purpose of
determining partnership gross value under this paragraph (a)(4)(i),
where a partnership interest is transferred as a result of the death of
a partner, the transferee's basis in its partnership interest is
determined without regard to section 1014(c), and is deemed to be
adjusted for that portion of the interest, if any, that is attributable
to items representing income in respect of a decedent under section
691.
(ii) Basis adjustments under section 743(b) resulting from
substituted basis transactions. This paragraph (a)(4)(ii) applies to
basis adjustments under section 743(b) that result from exchanges in
which the transferee's basis in the partnership interest is determined
in whole or in part by reference to the transferor's basis in the
interest or to the basis of other property held at any time by the
transferee (substituted basis transactions). In the case of a
substituted basis transaction, partnership gross value equals the value
of the entire partnership as a going concern, increased by the amount
of partnership liabilities at the time of the exchange giving rise to
the basis adjustment.
(iii) Basis adjustments under section 734(b). In the case of a
basis adjustment under section 734(b), partnership gross value equals
the value of the entire partnership as a going concern immediately
following the distribution causing the adjustment, increased by the
amount of partnership liabilities immediately following the
distribution.
(5) Determining the values of section 197 intangibles--(i) Two
classes. If the aggregate value of partnership property other than
section 197 intangibles (as determined in paragraph (a)(3) of this
section) is equal to or greater than partnership gross value (as
determined in paragraph (a)(4) of this section), then all section 197
intangibles are deemed to have a value of zero for purposes of this
section. In all other cases, the aggregate value of the partnership's
section 197 intangibles (the residual section 197 intangibles value) is
deemed to equal the excess of partnership gross value over the
aggregate value of partnership property other than section 197
intangibles. The residual section 197 intangibles value must be
allocated between two asset classes in the following order--
(A) Among section 197 intangibles other than goodwill and going
concern value; and
(B) To goodwill and going concern value.
(ii) Values assigned to section 197 intangibles other than goodwill
and going concern value. The fair market value assigned to a section
197 intangible (other than goodwill and going concern value) shall not
exceed the actual fair market value (determined on the basis of all the
facts and circumstances) of that asset on the date of the relevant
transfer. If the residual section 197 intangibles value is less than
the sum of the actual fair market values (determined on the basis of
all the facts and circumstances) of all section 197 intangibles (other
than goodwill and going concern value) held by the partnership, then
the residual section 197 intangibles value must be allocated among the
individual section 197 intangibles (other than goodwill and going
concern value) as follows. The residual section 197 intangibles value
is assigned first to any section 197 intangibles (other than goodwill
and going concern value) having potential gain that would be treated as
unrealized receivables under the flush language of section 751(c)
(flush language receivables) to the extent of the basis of those
section 197 intangibles and the amount of income arising from the flush
language receivables that the partnership would recognize if the
section 197 intangibles were sold for their actual fair market values
(determined based on all the facts and circumstances) (collectively,
the flush language receivables value). If the value assigned to section
197 intangibles (other than goodwill and going concern value) is less
than the flush language receivables value, then the assigned value is
allocated among the properties giving rise to the flush language
receivables in proportion to the flush language receivables value in
those properties. Any remaining residual section 197 intangibles value
is allocated among the remaining portions of the section 197
intangibles (other than goodwill and going concern value) in proportion
to the actual fair market values of such portions (determined based on
all the facts and circumstances).
(iii) Value assigned to goodwill and going concern value. The fair
market value of goodwill and going concern value is the amount, if any,
by which
[[Page 34297]]
the residual section 197 intangibles value exceeds the aggregate value
of the partnership's section 197 intangibles (other than goodwill and
going concern value).
(6) Examples. The provisions of paragraphs (a)(2) through (5) are
illustrated by the following examples, which assume that the
partnerships have an election in effect under section 754 at the time
of the transfer and that the assets of each partnership constitute a
trade or business (as described in Sec. 1.1060-1(b)(2)). Except as
provided, no partnership asset (other than inventory) is property
described in section 751(a), and partnership liabilities are secured by
all partnership assets. The examples are as follows:
Example 1. (i) A is the sole general partner in PRS, a limited
partnership having three equal partners. PRS has goodwill and going
concern value, two section 197 intangibles other than goodwill and
going concern value (Intangible 1 and Intangible 2), and two other
assets with fair market values (determined using all the facts and
circumstances) as follows: inventory worth $1,000,000 and a building
(a capital asset) worth $2,000,000. The fair market value of each of
Intangible 1 and Intangible 2 is $50,000. PRS has one liability of
$1,000,000, for which A bears the entire risk of loss under section
752 and the regulations thereunder. D purchases A's partnership
interest for $650,000, resulting in a basis adjustment under section
743(b). After the purchase, D bears the entire risk of loss for
PRS's liability under section 752 and the regulations thereunder.
Therefore, D's basis in its interest in PRS is $1,650,000.
(ii) D's basis in the transferred partnership interest (reduced
by the amount of such basis that is attributable to partnership
liabilities) is $650,000 ($1,650,000--$1,000,000). Under paragraph
(a)(4)(i) of this section, partnership gross value is $2,950,000
(the amount that, if assigned to all partnership property, would
result in a liquidating distribution to D equal to $650,000).
(iii) Under paragraph (a)(3) of this section, the inventory has
a fair market value of $1,000,000, and the building has a fair
market value of $2,000,000. Thus, the aggregate value of partnership
property other than section 197 intangibles, $3,000,000, is equal to
or greater than partnership gross value, $2,950,000. Accordingly,
under paragraphs (a)(3) and (5) of this section, the value assigned
to each of the partnership's assets is as follows: inventory,
$1,000,000; building, $2,000,000; Intangibles 1 and 2, $0; and
goodwill and going concern value, $0. D's section 743(b) adjustment
must be allocated under paragraph (b) of this section using these
assigned fair market values.
Example 2. (i) Assume the same facts as in Example 1, except
that the fair market values of Intangible 1 and Intangible 2 are
each $300,000, and that D purchases A's interest in PRS for
$1,000,000. After the purchase, D's basis in its interest in PRS is
$2,000,000.
(ii) D's basis in the transferred partnership interest (reduced
by the amount of such basis that is attributable to partnership
liabilities) is $1,000,000 ($2,000,000--$1,000,000). Under paragraph
(a)(4)(i) of this section, partnership gross value is $4,000,000
(the amount that, if assigned to all partnership property, would
result in a liquidating distribution to D equal to $1,000,000).
(iii) Under paragraph (a)(5) of this section, the residual
section 197 intangibles value is $1,000,000 (the excess of
partnership gross value, $4,000,000, over the aggregate value of
assets other than section 197 intangibles, $3,000,000 (the sum of
the value of the inventory, $1,000,000, and the value of the
building, $2,000,000)). The partnership must determine the values of
section 197 assets by allocating the residual section 197
intangibles value among the partnership's assets. The residual
section 197 intangibles value is assigned first to section 197
intangibles other than goodwill and going concern value, and then to
goodwill and going concern value. Thus, $300,000 is assigned to each
of Intangible 1 and Intangible 2, and $400,000 is assigned to
goodwill and going concern value (the amount by which the residual
section 197 intangibles value, $1,000,000, exceeds the fair market
value of section 197 intangibles other than goodwill and going
concern value, $600,000). D's section 743(b) adjustment must be
allocated under paragraph (b) of this section using these assigned
fair market values.
Example 3. (i) Assume the same facts as in Example 1, except
that the fair market values of Intangible 1 and Intangible 2 are
each $300,000, and that D purchases A's interest in PRS for
$750,000. After the purchase, D's basis in its interest in PRS is
$1,750,000. Also assume that Intangible 1 was originally purchased
for $300,000, and that its adjusted basis has been decreased to
$50,000 as a result of amortization. Assume that, if PRS were to
sell Intangible 1 for $300,000, it would recognize $250,000 of gain
that would be treated as an unrealized receivable under the flush
language in section 751(c).
(ii) D's basis in the transferred partnership interest (reduced
by the amount of such basis that is attributable to partnership
liabilities) is $750,000 ($1,750,000--$1,000,000). Under paragraph
(a)(4)(i) of this section, partnership gross value is $3,250,000
(the amount that, if assigned to all partnership property, would
result in a liquidating distribution to D equal to $750,000).
(iii) Under paragraph (a)(5) of this section, the residual
section 197 intangibles value is $250,000 (the amount by which
partnership gross value, $3,250,000, exceeds the aggregate value of
partnership property other than section 197 intangibles,
$3,000,000). Intangible 1 has potential gain that would be treated
as unrealized receivables under the flush language of section
751(c). The flush language receivables value in Intangible 1 is
$300,000 (the sum of PRS's basis in Intangible 1, $50,000, and the
amount of ordinary income, $250,000, that the partnership would
recognize if Intangible 1 were sold for its actual fair market
value). Because the residual section 197 intangibles value,
$250,000, is less than the flush language receivables value of
Intangible 1, Intangible 1 is assigned a value of $250,000, and
Intangible 2 and goodwill and going concern value are assigned a
value of zero. D's section 743(b) adjustment must be allocated under
paragraph (b) of this section using these assigned fair market
values.
Example 4. Assume the same facts as in Example 1, except that
the fair market values of Intangible 1 and Intangible 2 are each
$300,000, and that A does not sell its interest in PRS. Instead, A
contributes its interest in PRS to E, a newly formed corporation
wholly-owned by A, in a transaction described in section 351. Assume
that the contribution results in a basis adjustment under section
743(b) (other than zero). PRS determines that its value as a going
concern immediately following the contribution is $3,000,000. Under
paragraph (a)(4)(ii) of this section, partnership gross value is
$4,000,000 (the value of PRS as a going concern, $3,000,000,
increased by the partnership's liability, $1,000,000, immediately
after the contribution). Under paragraph (a)(5) of this section, the
residual section 197 intangibles value is $1,000,000 (the amount by
which partnership gross value, $4,000,000, exceeds the aggregate
value of partnership property other than section 197 intangibles,
$3,000,000). Of the residual section 197 intangibles value, $300,000
is assigned to each of Intangible 1 and Intangible 2, and $400,000
is assigned to goodwill and going concern value (the amount by which
the residual section 197 intangibles value, $1,000,000, exceeds the
fair market value of section 197 intangibles other than goodwill and
going concern value, $600,000). E's section 743(b) adjustment must
be allocated under paragraph (b)(5) of this section using these
assigned fair market values.
Example 5. G is the sole general partner in PRS, a limited
partnership having three equal partners (G, H, and I). PRS has
goodwill and going concern value, two section 197 intangibles other
than goodwill and going concern value (Intangible 1 and Intangible
2), and two capital assets with fair market values (determined using
all the facts and circumstances) as follows: Vacant land worth
$1,000,000, and a building worth $2,000,000. The fair market value
of each of Intangible 1 and Intangible 2 is $300,000. PRS has one
liability of $1,000,000, for which G bears the entire risk of loss
under section 752 and the regulations thereunder. PRS distributes
the land to H in liquidation of H's interest in PRS. Immediately
prior to the distribution, PRS's basis in the land is $800,000, and
H's basis in its interest in PRS is $750,000. The distribution
causes the partnership to increase the basis of its remaining
property by $50,000 under section 734(b)(1)(B). PRS determines that
its value as a going concern immediately following the distribution
is $2,000,000. Under paragraph (a)(4)(iii) of this section,
partnership gross value is $3,000,000 (the value of PRS as a going
concern, $2,000,000, increased by the partnership's liability,
$1,000,000, immediately after the distribution). Under paragraph
(a)(5) of this section, the residual section 197 intangibles value
of PRS's section 197 intangibles is $1,000,000 (the amount by which
partnership gross value, $3,000,000, exceeds the aggregate value of
partnership property other than section 197 intangibles,
$2,000,000). Of the residual section 197 intangibles value,
[[Page 34298]]
$300,000 is assigned to each of Intangible 1 and Intangible 2, and
$400,000 is assigned to goodwill and going concern value (the amount
by which the residual section 197 intangibles value, $1,000,000,
exceeds the fair market value of section 197 intangibles other than
goodwill and going concern value, $600,000). PRS's section 734(b)
adjustment must be allocated under paragraph (c) of this section
using these assigned fair market values.
(b) Adjustments under section 743(b)--(1) Generally--(i)
Application. For basis adjustments under section 743(b) resulting from
substituted basis transactions, paragraph (b)(5) of this section shall
apply. For basis adjustments under section 743(b) resulting from all
other transfers, paragraphs (b)(2) through (4) of this section shall
apply. * * *
* * * * *
(3) * * *
(iii) Special rules--(A) Assets in which partner has no interest.
An asset with respect to which the transferee partner has no interest
in income, gain, losses, or deductions shall not be taken into account
in applying paragraph (b)(3)(ii)(B) of this section.
(B) Limitation in decrease of basis. In no event may the amount of
any decrease in basis allocated to an item of capital gain property
under paragraph (b)(3)(ii)(B) of this section exceed the partnership's
adjusted basis in that item (or in the case of property subject to the
remedial allocation method, the transferee's share of any remedial loss
under Sec. 1.704-3(d) from the hypothetical transaction). In the event
that a decrease in basis allocated under paragraph (b)(3)(ii)(B) of
this section to an item of capital gain property would otherwise exceed
the partnership's adjusted basis in that item, the excess must be
applied to reduce the remaining basis, if any, of other capital gain
assets pro rata in proportion to the bases of such assets (as adjusted
under this paragraph (b)(3)).
* * * * *
(4) * * *
(ii) * * *
Example. (i) A and B are equal partners in personal service
partnership PRS. In 2004, as a result of B's death, B's partnership
interest is transferred to T when PRS's balance sheet (reflecting a
cash receipts and disbursements method of accounting) is as follows
(based on all the facts and circumstances):
Assets
------------------------------------------------------------------------
Fair
Adjusted market
basis value
------------------------------------------------------------------------
Section 197 Intangible............................ $2,000 $5,000
Unrealized Receivables............................ 0 15,000
---------------------
Total..................................... $2,000 $20,000
---------------------------------------------------
Liabilities and Capital
------------------------------------------------------------------------
Adjusted Fair
per books market
value
---------------------------------------------------
Capital:
A............................................. 1,000 10,000
B............................................. 1,000 10,000
---------------------
Total..................................... $2,000 $20,000
------------------------------------------------------------------------
(ii) None of the assets owned by PRS is section 704(c) property,
and the section 197 intangible is not amortizable. The fair market
value of T's partnership interest on the applicable date of
valuation set forth in section 1014 is $10,000. Of this amount,
$2,500 is attributable to T's 50% share of the partnership's section
197 intangible, and $7,500 is attributable to T's 50% share of the
partnership's unrealized receivables. The partnership's unrealized
receivables represent income in respect of a decedent. Accordingly,
under section 1014(c), T's basis in its partnership interest is not
adjusted for that portion of the interest which is attributable to
the unrealized receivables. Therefore, T's basis in its partnership
interest is $2,500.
(iii) Under paragraph (a)(4)(i)(C) of this section, solely for
purposes of determining partnership gross value, T's basis in its
partnership interest is deemed to be $10,000. Under paragraph
(a)(4)(i) of this section, partnership gross value is $20,000 (the
amount that, if assigned to all partnership property, would result
in a liquidating distribution to T equal to $10,000).
(iv) Under paragraph (a)(5) of this section, the residual
section 197 intangibles value is $5,000 (the excess of partnership
gross value, $20,000, over the aggregate value of assets other than
section 197 intangibles, $15,000). The residual section 197
intangibles value is assigned first to section 197 intangibles other
than goodwill and going concern value, and then to goodwill and
going concern value. Thus, $5,000 is assigned to the section 197
intangible, and $0 is assigned to goodwill and going concern value.
T's section 743(b) adjustment must be allocated using these assigned
fair market values.
(v) At the time of the transfer, B's share of the partnership's
basis in partnership assets is $1,000. Accordingly, T receives a
$1,500 basis adjustment under section 743(b). Under this paragraph
(b)(4), the entire basis adjustment is allocated to the
partnership's section 197 intangible.
(5) Substituted basis transactions--(i) In general. This paragraph
(b)(5) applies to basis adjustments under section 743(b) that result
from exchanges in which the transferee's basis in the partnership
interest is determined in whole or in part by reference to the
transferor's basis in that interest. For exchanges on or after June 9,
2003, this paragraph (b)(5) also applies to basis adjustments under
section 743(b) that result from exchanges in which the transferee's
basis in the partnership interest is determined by reference to other
property held at any time by the transferee. For example, this
paragraph (b)(5) applies if a partnership interest is contributed to a
corporation in a transaction to which section 351 applies, if a
partnership interest is contributed to a partnership in a transaction
to which section 721(a) applies, or if a partnership interest is
distributed by a partnership in a transaction to which section 731(a)
applies.
* * * * *
(c) * * *
(5) * * *
[[Page 34299]]
Example. (i) A, B, and C form equal partnership PRS. A
contributes $50,000 and Asset 1, nondepreciable capital gain
property with a fair market value of $50,000 and an adjusted tax
basis of $25,000. B and C each contributes $100,000. PRS uses the
cash to purchase Assets 2, 3, 4, 5, and 6. Assets 2 and 3 are
nondepreciable capital assets, and Assets 4, 5, and 6 are inventory
that has not appreciated substantially in value within the meaning
of section 751(b)(3). Assets 4, 5, and 6 are the only assets held by
the partnership that are subject to section 751. The partnership has
an election in effect under section 754. After seven years, the
adjusted basis and fair market value of PRS's assets are as follows:
* * * * *
(d) Required statements. See Sec. 1.743-1(k)(2) for provisions
requiring the transferee of a partnership interest to provide
information to the partnership relating to the transfer of an interest
in the partnership. See Sec. 1.743-1(k)(1) for a provision requiring
the partnership to attach a statement to the partnership return showing
the computation of a basis adjustment under section 743(b) and the
partnership properties to which the adjustment is allocated under
section 755. See Sec. 1.732-1(d)(3) for a provision requiring a
transferee partner to attach a statement to its return showing the
computation of a basis adjustment under section 732(d) and the
partnership properties to which the adjustment is allocated under
section 755. See Sec. 1.732-1(d)(5) for a provision requiring the
partnership to provide information to a transferee partner reporting a
basis adjustment under section 732(d).
(e) Effective Date--(1) Generally. Except as provided in paragraphs
(b)(5) and (e)(2) of this section, this section applies to transfers of
partnership interests and distributions of property from a partnership
that occur on or after December 15, 1999.
(2) Special rules. Paragraphs (a) and (b)(3)(iii) of this section
apply to transfers of partnership interests and distributions of
property from a partnership that occur on or after June 9, 2003.
Sec. 1.755-2T [Removed]
0
Par. 3. Section 1.755-2T is removed.
0
Par. 4. In Sec. 1.1060-1, paragraph (e)(2) is revised to read as
follows:
Sec. 1.1060-1 Special allocation rules for certain asset
acquisitions.
* * * * *
(e) * * *
(2) Transfers of interests in partnerships. For reporting
requirements relating to the transfer of a partnership interest, see
Sec. 1.755-1(d).
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
0
Par. 5. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Sec. 602.101 [Amended]
0
Par. 6. In Sec. 602.101, paragraph (b), the entry for ``1.755-2T'' is
removed.
David A. Mader,
Assistant Deputy Commissioner of Internal Revenue.
Approved: May 22, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
[FR Doc. 03-14204 Filed 6-6-03; 8:45 am]
BILLING CODE 4830-01-P