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Regulations on allocations relating to contributed property affect securities partnerships.

On Dec. 21, 1993, proposed and temporary regulations were issued under Sec. 704(c), providing guidance on two issues not addressed in simultaneously issued final regulations that covered other aspects of the partnership-contributed property allocation rules. These two topics were the introduction of a new method of performing Sec. 704(c) allocations, called the remedial allocation method, and the creation of an exception to the normal property by property allocation rules that could be applied by certain securities partnerships.

Modification to proposed regulations made by final regulations

Remedial allocation mothod: Regs. Sec. 1.704-3(d) clarifies several ambiguities that existed in the proposed regulations with respect to the use of the remedial allocation method. First, a partnership must use a recovery method and period available for newly purchased property of the type contributed in computing "book" depreciation on the "built-in gain" portion of the book basis of affected property (i.e., the amount by which the property's fair market value exceeds its adjusted tax basis or previous book basis on the date of contribution or revaluation). The final regulations also clarify that remedial allocations do not affect the adjusted tax basis in partnership property. This can be particularly important in determining the amount of Sec. 704(c) minimum gain that exists with respect to contributed property for purposes of allocating nonrecourse debt under Regs. Sec. 1.752-3(a)(2).

Securities aggregation rules: Regs. Sec. 1.704-3(e)(3) considerably expands the scope of the special rule that allows "securities partnerships" to perform reverse Sec. 704(c) allocations on an aggregate basis by adopting a broad definition of the term securities partnership." Under Regs. Sec. 1.704-3(e)(3)(iii), partnerships that are either registered as management companies under the Investment Company Act of 1940 or that hold qualifying assets and reasonably expect, as of the end of the first tax year in which they adopt an aggregate approach, to make revaluations of their qualified assets at least annually and make all allocations in proportion to the partners' relative book capital accounts (except for reasonable special allocations to a partner providing management or investment advisory services), qualify to use the aggregation approach. Thus, even if a partnership is closely held (i.e., has five or fewer investors holding 50% or more of its capital interests), it can perform its reverse See. 704(c) allocations on an aggregate basis. The final regulations also permit "built-in gains" associated with revalued property of such partnerships to be netted with "built-in losses" associated with such properties in performing reverse Sec. 704(c) allocations, rather than requiring built-in gain and built-in loss properties to be separately aggregated.

Effective date

Regs. Sec. 1.704-3 applies to property contributed to a partnership and to revaluations of partnership property after Dec. 20, 1993. However, taxpayers can rely on the temporary and proposed regulations with respect to property contributed to a partnership and to revaluations after Dec. 20, 1993 and before Dec. 27, 1994.

From Glenn E. Dance, CPA, J.D., Washington, D. C.
COPYRIGHT 1995 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1995, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:Dance, Glenn E.
Publication:The Tax Adviser
Date:Nov 1, 1995
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