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Partner's basis.

The IRS has adopted final regulations (TD 9049) discussing special rules for determining the basis of a partner's interest under Sec. 705. The final rules address issues the IRS and Treasury considered during the development of final regulations (TD 8986) issued to prevent inappropriate increases or decreases in the adjusted basis of a corporate partner's interest in a partnership resulting from the partnership's disposition of the corporate partner's stock.

The rules, which are used to coordinate Secs. 705 and 1032, were effective on March 18, 2003, and generally apply to sales or exchanges of stock occurring after that date. However, Regs. Sec. 1.705-2(d), dealing with positions in stock, applies to sales or exchanges of stock occurring after March 28, 2002.

The proposed regulations were to apply when a corporation owned a direct or indirect interest in a partnership that owned stock in the corporation, the partnership distributed money or other property to another partner who recognized gain on the distribution during a year in which the partnership had no Sec. 754 election in effect and the partnership subsequently sold or exchanged the stock. According to the proposed regulations' preamble, it might be inconsistent with Secs. 705's and 1032's intent to increase the basis of the corporation's partnership interest by the total gain resulting from the partnership's sale or exchange of the stock that was not recognized by the corporation under Sec. 1032.

The final regulations follow the proposed rules, but extend them to situations in which (1) a corporation owns a direct or indirect interest in a partnership that owns stock in the corporation; (2) the partnership distributes money or other property to another partner who recognizes a loss on the distribution, or the basis of the property distributed to that partner is adjusted during a year in which the partnership does not have a Sec. 754 election in effect; and (3) the partnership subsequently sells or exchanges the stock.

According to the IRS, the revisions provide a more consistent approach and better conform the new regulations to the Sec. 705 final regulations issued on March 29, 2002 (TD 8986).
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Author:Laffie, Lesli S.
Publication:The Tax Adviser
Date:May 1, 2003
Words:352
Previous Article:2002 Data Book.
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