# Bulletin No. 1999–52

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Bulletin No. 1999–52
December 27, 1999

Internal Revenue

bulletin
HIGHLIGHTS
OF THIS ISSUE

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

INCOME TAX
Rev. Rul. 99–58, page 701.
Continuity of interest on repurchase of issuer’s shares.
This ruling holds that an open market repurchase of shares
through a broker, following a potential reorganization, has no
effect on continuity of interest in a potential reorganization.

T.D. 8847, page 701.
Final regulations under section 743, 755, and 1017 of the
Code provide guidance to partnerships and their partners concerning the optional adjustments to the basis of partnership
property, the allocation of basis adjustments among partnership assets, and the computation of a partner’s share of the
adjusted basis of depreciable partnership property.

Rev. Proc. 99–50, page 757.
Combined information reporting. Combined information
reporting by a successor business entity following a merger
or acquisition is permitted in certain situations. Rev. Proc.
90–57 and Rev. Rul. 69-556 modified and superseded.

EMPLOYEE PLANS
Notice 99–61, page 762.
Weighted average interest rate update. The weighted
average interest rate for December 1999 and the resulting
permissible range of interest rates used to calculate current
liabilities for purposes of the full funding limitation of section
412(c)(7) of the Code are set forth.

EXEMPT ORGANIZATIONS
Announcement 99–115, page 763.
A list is given of organizations now classified as private foundations.

ADMINISTRATIVE
T.D. 8848, page 723.
This rule establishes the procedures under which the Ser-

vice may use penalty mail to aid in the location and recovery
of missing children.

Rev. Proc. 99–49, page 725.
Methods of accounting; automatic consent. Procedures
are provided under which a taxpayer may obtain automatic
consent of the Commissioner to change certain methods of
accounting. REv. Proc. 98–60 modified and superseded.

Rev. Proc. 99–51, page 760.
This procedure amplifies section 5 of Rev. Proc. 99–3,
which sets forth areas of the Code under the jurisdiction of
the Associate Chief Counsel (Domestic) in which the Service
will not issue advance rulings or determination letters. The
following issue is added to those listed in section 5: Whether
a state law limited partnership electing under section
301.7701–3 to be classified as an association taxable as a
corporation has more than one class of stock for purposes
of section 1361(b)(1)(D). Rev. Proc. 99–3 amplified.

Notice 99–59, page 761.
Tax avoidance using distributions of encumbered property. Taxpayers and their representatives are alerted that the
purported losses arising from certain types of transactions are
not properly allowable for federal income tax purposes. Also,
the Service may impose penalties on participants in these
transactions or, as applicable on persons who participate in
the promotion or reporting of these transactions.

Notice 99–60, page 762.
Information reporting; royalty payments; Indians. Taxpayers are informed that the information reporting requirements
of section 6050N of the Code do no apply to payments of royalties that are not subject to income tax because they are derived directly by a noncompetent Indian from allotted and restricted land under the General Allotment Act of similar acts.

Announcement 99–116, page 763.
This document corrects the Actions on Decisions published
in 1999–35 I.R.B. 314. All 7 footnotes describing the “Acquiescence” or “Nonacquiescence” in each decision included the words “in result only,” which were erroneous. The
correct footnotes are printed in this announcement.

Social Security Contribution and Benefit Base for 2000 on page 763.
Finding Lists begin on page ii.

Department of the Treasury
Internal Revenue Service

The IRS Mission
Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities

and by applying the tax law with integrity and fairness to
all.

Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents are consolidated semiannually into
Cumulative Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and proce-

dures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual basis,
and are published in the first Bulletin of the succeeding semiannual period, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 368.—Definitions Relating
to Corporate Reorganizations
26 CFR 1.368–1(e): Continuity of interest.

Continuity of interest on repurchase
of issuer’s shares. This ruling holds that
an open market repurchase of shares
through a broker has no effect on continuity of interest in a potential reorganization.

Rev. Rul. 99-58
ISSUE
What is the effect on continuity of interest when a potential reorganization is
followed by an open market reacquisition
of P’s stock?
FACTS
T merges into P, a corporation whose
stock is widely held, and is publicly and
actively traded. P has one class of common stock authorized and outstanding. In
the merger, T shareholders receive 50 percent common stock of P and 50 percent
cash. Viewed in isolation, the exchange
would satisfy the continuity of interest requirement of § 1.368-1(e) of the Income
Tax Regulations. However, in an effort to
prevent dilution resulting from the issuance of P shares in the merger, P’s preexisting stock repurchase program is
modified to enable P to reacquire a number of its shares equal to the number issued in the acquisition of T. The number
of shares repurchased will not exceed the
total number of P shares issued and outstanding prior to the merger. The repurchases are made following the merger, on
the open market, through a broker for the
prevailing market price. P’s intention to
repurchase shares was announced prior to
the T merger, but the repurchase program
was not a matter negotiated with T or the
T shareholders. There was not an understanding between the T shareholders and
P that the T shareholders’ ownership of P
stock would be transitory. Because of the
mechanics of an open market purchase, P
does not know the identity of a seller of P
stock, nor does a former T shareholder
who receives P stock in the merger and

1999–52 I.R.B.

subsequently sells it know whether P is
the buyer. Without regard to the repurchase program, a market exists for the
newly-issued P stock held by the former T
shareholders. During the time P undertakes its repurchase program, there are
sales of P stock on the open market,
which may include sales of P shares by
former T shareholders.
LAW AND ANALYSIS
Requisite to a reorganization under the
Internal Revenue Code is a continuity of
interest as described in § 1.368–1(e).
Section 1.368–1(b). The general purpose
of the continuity of interest requirement is
“to prevent transactions that resemble
sales from qualifying for nonrecognition
of gain or loss available to corporate reorganizations.” Section 1.368–1(e)(1)(i).
To achieve this purpose, the regulation
provides that a proprietary interest in the
target corporation is not preserved to the
extent that, “in connection with the potential reorganization, . . . stock of the issuing corporation furnished in exchange for
a proprietary interest in the target corporation in the potential reorganization is redeemed.” Id. However, for purposes of
the continuity requirement, “a mere disposition of stock of the issuing corporation received in the potential reorganization to persons not related . . . to the
issuing corporation is disregarded.” Id.
The regulation provides that all facts and
circumstances will be considered in determining whether, in substance, a proprietary interest in the target corporation is
preserved.
Under the facts set forth above, continuity of interest is satisfied. There was
not an understanding between the T
shareholders and P that the T shareholders’ ownership of the P shares would be
transitory. Further, because of the mechanics of an open market repurchase, the
repurchase program does not favor participation by the former T shareholders.
Therefore, even if it could be established
that P has repurchased P shares from former T shareholders in the repurchase program, any such purchase would be coincidental. The merger and the stock
repurchase together in substance would
not resemble a sale of T stock to P by the

701

former T shareholders and, thus, the repurchase would not be treated as “in connection with” the merger. Under the facts
presented, a sale of P stock on the open
market by a former T shareholder during
the repurchase program will have the same
effect on continuity of interest as a mere
disposition to persons not related to P.
HOLDING
Under the facts presented, the open
market repurchase of shares through a
broker has no effect on continuity of interest in the potential reorganization.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Marie C. Milnes-Vasquez of the
Office of Assistant Chief Counsel (Corporate). For further information regarding
this revenue ruling, contact Ms. MilnesVasquez on (202) 622-7770 (not a tollfree call).

Section 743.—Optional
Adjustment to Basis of
Partnership Property
26 CFR 1.743-1: Optional adjustment to basis of
partnership property.

T.D. 8847
DEPARTMENT OF THE TREASURY

Internal Revenue Service
26 CFR Parts 1 and 602
Adjustments Following Sales of Partnership Interests
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final Regulations.
SUMMARY: This document finalizes
regulations relating to the optional adjustments to the basis of partnership property
following certain transfers of partnership
interests under section 743, the calculation of gain or loss under section 751(a)
following the sale or exchange of a partnership interest, the allocation of basis adjustments among partnership assets under
section 755, the allocation of a partner’s
basis in its partnership interest to proper-

December 27, 1999

ties distributed to the partner by the partnership under section 732(c), and the
computation of a partner’s proportionate
share of the adjusted basis of depreciable
property (or depreciable real property)
under section 1017. The changes will affect partnerships and partners where there
are transfers of partnership interests, distributions of property, or elections under
sections 108(b)(5) or (c). In addition, the
final regulations under section 732(c) reflect changes to the law made by the Taxpayer Relief Act of 1997.
DATES: Effective Dates: These regulations are effective December 15, 1999.
Applicability Date: These regulations
apply to transfers of partnership interests
and distributions occurring on or after December 15, 1999.
FOR FURTHER INFORMATION CONTACT: Matthew Lay, (202) 622-3050.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information in these
final regulations have been reviewed and
approved by the Office of Management
and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507)
under control number 1545-1588. Responses to these collections of information are mandatory for partnerships that
have made an election under section 754
and for which a section 743 transfer has
been made, and for partnerships which
distribute property in a transaction subject
to section 732(d).
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
control number assigned by the Office of
Management and Budget.
The estimated annual burden per respondent varies from 1 hour to 300 hours,
depending on the individual circumstances, with an estimated average of 4
hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Internal Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224, and to the Office of
Management and Budget, Attn: Desk
Officer for the Department of the Treasury, Office of Information and Regula-

December 27, 1999

tory Affairs, Washington, DC 20503.
Books or records relating to these collections of information must be retained
as long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
This document (a) revises §§1.743-1
and 1.755-1 of the Income Tax Regulations (26 CFR part 1), and (b) amends
§§1.732-1, 1.732-2, 1.734-1, 1.751-1,
1.754-1, and §1.1017-1 of the Income Tax
Regulations.
On January 29, 1998, proposed regulations (REG 209682-94) were published in
the Federal Register (63 FR 4408).
Written comments were received in response to the notice of proposed rulemaking. One speaker provided testimony at a
public hearing held on September 10,
1998.
After consideration of all the comments, the proposed regulations under
sections 732, 734, 743, 751, 755, and
1017 are adopted, as revised by this Treasury Decision.
Explanation of Revisions and
Summary of Contents
1. Basis in Distributed Property
(a) Mandatory application of section
732(d). Section 1.732-1(d)(4) of the current regulations requires transferees to
apply the special basis rule in certain
cases. In the preamble to the proposed
regulations, the IRS and the Treasury Department requested comments on the
proper scope of section 732(d), and
specifically, under what circumstances, if
any, the Secretary should continue to exercise his authority to mandate the application of section 732(d) to a transferee.
Several commentators suggested that the
mandatory application of section 732(d)
no longer should be required, because the
changes made to section 732(c) by the
Taxpayer Relief Act of 1997, Public Law
105-34, 111 Stat. 788, 945-46 (1997),
make the distortions targeted by the regulations less likely to occur. However,
other commentators noted that distortions

702

caused by section 732(c) still may occur.
Accordingly, the rule contained in
§1.732-1(d)(4), which requires the
mandatory application of section 732(d)
in certain cases, remains in effect.
(b) Statement required by partnership.
Because partners, rather than partnerships, are required to report basis adjustments under section 732(d), the final regulations require partnerships to provide
transferees with such information as is
necessary for the transferees properly to
compute basis adjustments made under
section 732(d). This information must be
provided if a transferee notifies a partnership that it plans to make the election
under section 732(d) or if a partnership
makes a distribution subject to the mandatory application of section 732(d).
(c) Effective date. One commentator
asked for clarification regarding the application of the final regulations to section
732(d) adjustments. If section 732(d) applies to a distribution, it is necessary to
calculate the basis adjustments which
would have been required under section
743(b) if a section 754 election were in
effect for the partnership in the taxable
year in which the partnership interest was
transferred to the partner. In calculating
these basis adjustments, the partnership
should apply the final regulations under
section 743 and 755 if the distribution to
which section 732(d) applies occurs after
December 15, 1999.
2. Basis Adjustments Under Section
743(b)
(a) Coordination with section 704(c).
Where a partnership adopts the remedial
allocation method, the proposed regulations provide that the section 704(c) builtin gain portion of a basis adjustment
under section 743(b) shall be recovered
over the remaining cost recovery period
for the section 704(c) built-in gain. Some
commentators suggested that the final
regulations should provide this treatment
for the section 704(c) built-in gain portion
of the adjustment regardless of the
method elected by the partnership for allocating section 704(c) built-in gain and
loss. The IRS and the Treasury Department continue to believe that, except for
partnerships which adopt the remedial allocation method, it is appropriate for sec-

1999–52 I.R.B.

tions 704(c) and 743(b) to operate independently. Accordingly, this change has
not been adopted.
In the preamble to the proposed regulations, comments were requested concerning the application of the remedial allocation method to contributed property
where there are no distortions caused by
the ceiling rule at the time the property
was contributed to the partnership. Even
if it is not clear that the ceiling rule will
apply at the time the property is contributed because the adjusted basis of the
contributed property is sufficient so that
the non-contributing partners will be allocated their appropriate share of depreciation or amortization attributable to the
property, the partnership’s adoption of the
remedial method still may be relevant due
to allocations resulting from a subsequent
disposition of the property. For instance,
suppose that partners A and B form a partnership and agree that each partner will be
allocated a 50 percent share of all partnership items, and that the partnership will
make allocations under section 704(c)
using the traditional method. A contributes depreciable property with an adjusted tax basis of $40 and a book value
of $50, and B contributes $50 in cash. At
the time of the contribution, it is not readily apparent that the ceiling rule will have
any application. However, if, before any
federal income tax depreciation accrues
with respect to the contributed property,
the property’s value declines to $40, and
the property is sold for that amount, there
will be no tax gain or loss. The book loss
of $10 would be shared equally between
A and B. In this situation, the ceiling rule
would prevent B from being allocated the
$5 tax loss to which it otherwise would be
entitled. However, if the partnership
elected to use the remedial method with
respect to the contributed property, B
would be allocated a $5 tax loss, and A
would be allocated a corresponding $5 tax
gain. In addition, if a contributing partner
transfers its interest in a partnership during a period when a section 754 election
is in effect, the section 704(c) method
adopted by the partnership will determine
the recovery period for the built-in gain
portion of the transferee’s section 743(b)
adjustment. The IRS and the Treasury
Department believe that under the current
regulations under section 704(c), a partnership may use the remedial method

1999–52 I.R.B.

under §1.704-3, even where it is not readily apparent at the time the property is
contributed that the ceiling rule will be
applicable.
(b) Previously taxed capital. One commentator suggested that the second sentence in proposed §1.743-1(d)(2), relating
to the correlation between a partner’s interest in previously taxed capital and the
partnership’s capital accounts, is redundant and should be deleted. This suggestion has been adopted; however, no substantive change is intended by the
deletion.
(c) Common basis election. Some
commentators suggested that the provision in the proposed regulations that permitted the partners to elect to apply negative basis adjustments under section
743(b) to the partnership’s common basis
should be deleted. The commentators argued that the provision was contrary to
the purpose of section 743(b), because it
permitted basis adjustments under section
743(b) to affect nontransferring partners.
The commentators also argued that the
provision would be used by a small number of partnerships and would add unnecessary complexity to the regulations. In
response to these suggestions, the provision that permitted the partners to elect to
apply negative basis adjustments under
section 743(b) to the partnership’s common basis has been deleted.
(d) Statements by partners. Some commentators suggested modifying the statements which partners are required to provide to the partnership in the case of
transfers which result in basis adjustments
under section 743(b). Many of these suggestions have been adopted. For example, the regulations specify that the transferee of a partnership interest is required
to provide the name, address, and taxpayer identification number of the transferor only if that information is ascertainable by the transferee. The regulations
also specify that if a partnership interest is
transferred to a nominee which is required
to furnish the statement under §1.6031(c)1T to the partnership, the nominee may
satisfy the notice requirements of both the
section 743 and 6031 regulations by providing a single statement with respect to
that transfer, but only if the statement satisfies all requirements of both regulations.
The regulations require the transferee
to sign the statement under penalties of

703

perjury, and require the transferee to provide the amount of any liabilities assumed
or taken subject to by the transferee, and
any other information necessary for the
partnership to compute the transferee’s
basis in the partnership interest. In order
to assist the partnership in properly calculating depreciation and amortization deductions which may be subject to antichurning provisions, the regulations
require the transferee to describe its relationship, if any, to the transferor. Finally,
the statement required by a transferee that
acquires an interest by death must include
the date of the decedent’s death.
One commentator suggested that the
statement required by a transferee that acquires a partnership interest by sale or exchange should be provided within 30 days
of the sale or exchange, regardless of
whether or not the transfer occurs at the
end of the calendar year. This change has
been adopted.
One commentator suggested that references to the tax matters partner in §1.7431(k) of the proposed regulations (regarding the partnership’s obligations where a
partner’s statement is clearly erroneous,
or a partner fails to notify the partnership
that an interest has been transferred and
the partnership has actual knowledge of
the transfer) should be changed. This
commentator emphasized that while the
tax matters partner has a specialized role
with respect to consolidated administrative and judicial proceedings to determine
the tax treatment of partnership items at
the partnership level, the tax matters partner does not have any special responsibilities with respect to federal income tax reporting. The final regulations adopt this
comment. Section 1.743-1(k) now refers
to partners who are responsible for federal
income tax reporting by the partnership.
(e) Oil and gas. One commentator suggested that the example described in
§1.743-1(j)(6) should be changed to describe a non- oil and gas property. This
change has been made. The commentator
also suggested that in the case of domestic
oil and gas properties that are depleted at
the partner level, the transferee partner
(rather than the partnership) should be required to make and allocate basis adjustments among such properties. The final
regulations adopt this comment.
The same commentator suggested that
the regulations should specify a method

December 27, 1999

for adjusting the basis of section
613A(c)(7)(D) properties in order to account for percentage depletion made by a
partner with respect to such properties.
Under the principles of §1.743-1(j), percentage depletion should reduce first any
carryover basis under §1.613A3(e)(6)(iv). After the carryover basis has
been recovered, any further percentage
depletion should reduce the section 743
adjustment for the property.
3. Sales of Partnership Interests
One commentator suggested that references to fair market value should specify
whether fair market value is determined
taking into account section 7701(g),
which generally provides that fair market
value shall be treated as being not less
than the amount of any nonrecourse indebtedness to which the property is subject. The regulations specify that for purposes of the hypothetical sale employed
to determine the income or loss realized
by a partner upon the sale or exchange of
its interest in section 751 property, fair
market value is determined taking into account section 7701(g). Basis adjustments
under section 743(b) also are allocated by
reference to a hypothetical transaction.
The IRS and the Treasury Department intend to issue guidance in the near future
which will provide rules for determining
the fair market value of partnership assets
in certain situations, including for purposes of allocating section 743(b) basis
adjustments upon the transfer of a partnership interest. The IRS and the Treasury Department anticipate that the guidance will provide that section 7701(g)
will apply in determining the fair market
value of partnership assets for purposes of
allocating section 743(b) basis adjustments.
One commentator suggested that where
a partnership interest is sold or exchanged, the transferor and the transferee
of a partnership interest should be permitted jointly to assign values to partnership
assets in a written agreement. Because
this approach is inconsistent with the hypothetical sale approach of the regulations, this suggestion has not been
adopted.
4. Elections Under Section 754
One commentator requested that partnerships be granted a one-time right to revoke section 754 elections in effect for
such partnerships. Given the significant

December 27, 1999

changes to the rules made by these final
regulations as compared to the regulations
that were in effect at the time that section
754 elections previously were made, the
IRS and Treasury believe that it is appropriate to provide for a one-time revocation of such elections. Accordingly, a
partnership having an election in effect
under section 754 for its taxable year that
includes December 15, 1999 may revoke
such election by attaching a statement to
the partnership’s return for that year. The
return must be filed on or before the due
date (including extensions) for the return
for that year.
5. Allocation of Basis Adjustments Among
Partnership Assets
(a) Income in respect of a decedent.
One commentator requested that the final
regulations illustrate the allocation of
basis adjustments among partnership assets where one or more of such assets represents income in respect of a decedent.
Where a partnership interest is transferred
as a result of the death of a partner, under
section 1014(c) the transferee’s basis in
its partnership interest is not adjusted for
that portion of the interest, if any, which is
attributable to items representing income
in respect of a decedent under section
691. Because the transferee’s basis in its
partnership interest does not include the
value of assets which represent income in
respect of a decedent, the section 743(b)
adjustment likewise does not reflect the
value of such assets. George Edward
Quick’s Trust, 54 TC 1336 (1970) (acq.),
aff’d per curiam, 444 F.2d 90 (8th Cir.
1971); Chrissie H. Woodhall, 28 T.C.M.
1438 (1969), aff’d, 454 F.2d 226 (9th Cir.
1972); Rev. Rul. 66-325, 1966-2 C.B.
249. Where a partnership holds assets
that represent income in respect of a decedent, the section 743(b) adjustment
should be allocated solely to other assets.
Accordingly, the final regulations provide
that if a partnership interest is transferred
as a result of the death of a partner, and
the partnership holds assets representing
income in respect of a decedent, no part
of the basis adjustment under section
743(b) is allocated to these assets.
(b) Transferred basis transactions. One
commentator called for a revised system
for allocating basis adjustments under
section 743(b) which are triggered by exchanges in which the transferee’s basis in
the interest is determined in whole or in

704

part by reference to the transferor’s basis
in the interest. In many such cases, the
net section 743(b) adjustment will be
zero. However, a positive or negative
section 743(b) adjustment may result, because the transferee’s basis in the interest
may not be equal to the transferee’s share
of the partnership’s bases in its assets.
The IRS and the Treasury Department
believe that, although these transferred
basis transactions involve transfers which
are subject to section 743(b), the new,
comprehensive basis allocation rules in
the proposed regulations should not be
available. For example, where a partnership interest is contributed to a corporation in a transaction to which section 351
applies, or to a partnership in a transaction to which section 721(a) applies, the
transferor merely has changed the form of
its investment. If the allocation rules
which apply to other section 743(b) transfers were applied to these exchanges, then
partners could use these exchanges to
shift basis from capital gain assets to ordinary income assets, or vice versa.
Therefore, the final regulations contain
special basis allocation rules for transferred basis exchanges. The special rules
generally are modeled on the rules for allocating basis adjustments under section
734(b). The final regulations do not contain a specific anti-abuse rule regarding
the special basis allocation rules which
are applicable to such transfers. However, there may be situations where taxpayers will attempt to undertake abusive
transactions using these special rules. For
instance, a partner could acquire a partnership interest during a year in which no
section 754 election is in effect, and then
(in a related transaction) contribute the
property to a wholly-owned corporation
in order to take advantage of the basis allocation rules applicable to transferred
basis exchanges. In appropriate situations, the IRS may attack such abusive
transactions under a variety of judicial
doctrines, including substance over form
or step transaction, or under §1.701-2 of
the regulations.
(c) Unrealized receivables under section 751(c). One commentator requested
that the final regulations illustrate the effect of depreciation recapture on the allocation of basis adjustments among partnership assets under section 755. For
purposes of this section, the final regula-

1999–52 I.R.B.

tions treat depreciation recapture, and any
other properties or potential gain treated
as unrealized receivables under section
751(c) and the regulations thereunder, as
separate assets that are ordinary income
property.
(d) Special rules for securities partnerships and tiered partnerships. One commentator suggested that the regulations
permit securities partnerships to allocate
basis adjustments among partnership assets using an aggregation method. Another commentator requested that the regulations clarify how the regulations would
apply to tiered partnerships. The IRS and
the Treasury Department believe that a
method for allocating basis adjustments
among partnership assets on an aggregate
basis is not consistent with the hypothetical sale of individual assets, which is required by the regulations. In addition, the
IRS and Treasury Department believe that
special rules for tiered partnerships would
make the regulations more complex.
Therefore, these changes have not been
adopted.
6. Other Comments
One commentator suggested that for
purposes of allocating basis adjustments
among partnership assets, the values of all
partnership assets should be determined
by reference to the basis of the transferee
or distributee partner in its partnership interest. This suggestion is being considered in connection with a separate project
currently under review by the IRS and the
Treasury Department.
One commentator suggested that the
language of section 743 does not authorize regulations that permit both positive
and negative adjustments as part of the
same transaction. The IRS and the Treasury Department continue to believe that
this aspect of the regulations is within the
IRS’s authority to administer sections 743
and 755.
Special Analyses
It has been determined that these final
regulations are not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It has been determined that a final regulatory flexibility
analysis is required for the collection of
information in this Treasury decision
under 5 U.S.C. 604. This analysis is set

1999–52 I.R.B.

forth below under the heading “Final
Regulatory Flexibility Act Analysis.”
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 their impact on
small business. No comments were received regarding the impact of the regulations on small business.
Final Regulatory Flexibility Act
Analysis
This analysis is required under the Regulatory Flexibility Act (5 U.S.C. chapter
6). In general, the regulations require a
transferee that acquires an interest in a
partnership with an election under section
754 in effect to notify the partnership of
the transfer. This notification must include the name and taxpayer identification number of the transferee and the
transferee’s basis in the acquired partnership interest. The partnership is required
to include a statement with its Form 1065,
U.S. Partnership Return of Income, for
the taxable year in which the partnership
acquires knowledge of the transfer. This
statement must identify the name and taxpayer identification number of the transferee, the computation of the basis adjustment, and the allocation of that
adjustment to partnership properties.
These requirements will ensure that the
partnership has notice that a transfer has
occurred and that the proper basis adjustments are computed. The legal basis for
these requirements is contained in sections 743(b), 6001, and 7805(a).
If an interest is transferred in a partnership holding domestic oil and gas properties that are depleted at the partner level
under 613A(c)(7)(D), the regulations require the transferee partner (rather than
the partnership) to make and allocate
basis adjustments under section 743(b)
among such properties.
There were approximately 1,494,000
partnerships in 1994. However, these
regulations apply only to partnerships that
have made an election under section 754.
The election under section 754 is generally not made unless there has been a
transfer of a partnership interest or a distribution by the partnership. Moreover,
the effects of the election attach to spe-

705

cific items of partnership property and
may provide only temporary benefits for
the partners. Except for the one-time revocation which is allowed in connection
with the promulgation of these final regulations, the election cannot be revoked
without the consent of the Secretary. The
IRS and the Treasury Department believe
that most partnerships do not make the
election under section 754. Therefore,
most partnerships will not be affected by
the regulations in any given year.
After a partner conveys information to
the partnership concerning a transfer of a
partnership interest, the partnership must
adjust the partner’s interest in the basis of
partnership property. Because these basis
adjustments will affect the partner’s share
of depreciation or amortization deductions and amounts of gain or loss on the
disposition of certain items of partnership
property, the partnership must prepare
and maintain special entries on its books.
However, in many cases, partnership returns are prepared using computer software that can prepare and maintain these
special entries after the initial year.
The IRS and the Treasury Department
are not aware of any federal rules that
may duplicate, overlap, or conflict with
the rule.
As an alternative to the disclosure described above, the IRS and the Treasury
Department considered, but rejected, a
rule that would have required the partners, and not the partnerships, to make the
basis adjustments and to determine the effects of the basis adjustments on the partners’ distributive shares. This alternative
was rejected because the IRS and the
Treasury Department believe that partnerships generally have better access to the
information necessary to report section
743 basis adjustments properly. To require the partners rather than the partnerships to bear the burden of reporting
would require the partnerships to provide
the partners with significant amounts of
information not otherwise needed by the
partners. There are no known alternative
rules that are less burdensome to the partnerships and their partners but that accomplish the purpose of the statute.
Finally, because partners, rather than
partnerships, are required to report basis
adjustments under section 732(d), the
final regulations require partnerships to
provide transferees with such information

December 27, 1999

as is necessary for the transferees properly to compute basis adjustments made
under section 732(d). This information
must be provided if a transferee notifies a
partnership that it plans to make the election under section 732(d) or if a partnership makes a distribution subject to the
mandatory application of section 732(d).
The IRS and the Treasury Department believe that this requirement will apply
under limited circumstances to a small
percentage of partnerships.
Drafting Information
The principal author of these regulations
is Matthew Lay of the Office of the Assistant Chief Counsel (Passthroughs and Special Industries). However, other personnel
from the IRS and the Treasury Department
participated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are ammended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.732-1 also issued under 26
U.S.C. 732.
Section 1.732-2 also issued under 26
U.S.C. 732.
Section 1.734-1 also issued under 26
U.S.C. 734.
Section 1.743-1 also issued under 26
U.S.C. 743.
Section 1.751-1 also issued under 26
U.S.C. 751.
Section 1.755-1 also issued under 26
U.S.C. 755. * * *
Section 1.1017-1 also issued under 26
U.S.C. 1017. * * *
Par. 2. Section 1.732-1 is amended as
follows:
1. Revise paragraph (c).
2. Revise paragraph (d)(1)(ii).
3. Revise the last sentence of paragraph
(d)(1)(v).
4. Revise paragraph (d)(1)(vi).
5. Revise paragraph (d)(4)(iii).
6. Remove the flush text and Examples
1 and 2 following paragraph (d)(4)(iii).

December 27, 1999

7. Add paragraph (d)(5).
The additions and revisions read as follows:
§1.732-1 Basis of distributed property
other than money.
*****
(c) Allocation of basis among properties distributed to a partner—(1)
General rule—(i) Unrealized receivables and inventory items. The basis to
be allocated to properties distributed to
a partner under section 732(a)(2) or (b)
is allocated first to any unrealized receivables (as defined in section 751(c))
and inventory items (as defined in section 751(d)(2)) in an amount equal to
the adjusted basis of each such property
to the partnership immediately before
the distribution. If the basis to be allocated is less than the sum of the adjusted bases to the partnership of the
distributed unrealized receivables and
inventory items, the adjusted basis of
the distributed property must be decreased in the manner provided in paragraph (c)(2)(i) of this section.
(ii) Other distributed property. Any
basis not allocated to unrealized receivables or inventory items under paragraph (c)(1)(i) of this section is allocated to any other property distributed
to the partner in the same transaction
by assigning to each distributed property an amount equal to the adjusted
basis of the property to the partnership
immediately before the distribution.
However, if the sum of the adjusted
bases to the partnership of such other
distributed property does not equal the
basis to be allocated among the distributed property, any increase or decrease
required to make the amounts equal is
allocated among the distributed property as provided in paragraph (c)(2) of
this section.
(2) Adjustment to basis allocation—
(i) Decrease in basis. Any decrease to
the basis of distributed property required under paragraph (c)(1) of this
section is allocated first to distributed
property with unrealized depreciation
in proportion to each property’s respective amount of unrealized depreciation
before any decrease (but only to the extent of each property’s unrealized depreciation). If the required decrease
exceeds the amount of unrealized depreciation in the distributed property,

706

the excess is allocated to the distributed
property in proportion to the adjusted
bases of the distributed property, as adjusted pursuant to the immediately preceding sentence.
(ii) Increase in basis. Any increase
to the basis of distributed property required under paragraph (c)(1)(ii) of this
section is allocated first to distributed
property (other than unrealized receivables and inventory items) with unrealized appreciation in proportion to each
property’s respective amount of unrealized appreciation before any increase
(but only to the extent of each property’s unrealized appreciation). If the
required increase exceeds the amount
of unrealized appreciation in the distributed property, the excess is allocated to the distributed property (other
than unrealized receivables or inventory items) in proportion to the fair
market value of the distributed property.
(3) Unrealized receivables and inventory items. If the basis to be allocated upon a distribution in liquidation
of the partner’s entire interest in the
partnership is greater than the adjusted
basis to the partnership of the unrealized receivables and inventory items
distributed to the partner, and if there is
no other property distributed to which
the excess can be allocated, the distributee partner sustains a capital loss
under section 731(a)(2) to the extent of
the unallocated basis of the partnership
interest.
(4) Examples. The provisions of this
paragraph (c) are illustrated by the following examples:
Example 1. A is a one-fourth partner in partnership PRS and has an adjusted basis in its partnership
interest of $650. PRS distributes inventory items
and Assets X and Y to A in liquidation of A’s entire
partnership interest. The distributed inventory items
have a basis to the partnership of $100 and a fair
market value of $200. Asset X has an adjusted basis
to the partnership of $50 and a fair market value of
$400. Asset Y has an adjusted basis to the partnership and a fair market value of $100. Neither Asset
X nor Asset Y consists of inventory items or unrealized receivables. Under this paragraph (c), A’s basis
in its partnership interest is allocated first to the inventory items in an amount equal to their adjusted
basis to the partnership. A, therefore, has an adjusted basis in the inventory items of $100. The remaining basis, $550, is allocated to the distributed

1999–52 I.R.B.

property first in an amount equal to the property’s
adjusted basis to the partnership. Thus, Asset X is
allocated $50 and Asset Y is allocated $100. Asset
X is then allocated $350, the amount of unrealized
appreciation in Asset X. Finally, the remaining
basis, $50, is allocated to Assets X and Y in proportion to their fair market values: $40 to Asset X
(400/500 x $50), and $10 to Asset Y (100/500 x
$50). Therefore, after the distribution, A has an adjusted basis of $440 in Asset X and $110 in Asset Y.
Example 2. B is a one-fourth partner in partnership PRS and has an adjusted basis in its partnership
interest of $200. PRS distributes Asset X and Asset
Y to B in liquidation of its entire partnership interest. Asset X has an adjusted basis to the partnership
and fair market value of $150. Asset Y has an adjusted basis to the partnership of $150 and a fair
market value of $50. Neither of the assets consists
of inventory items or unrealized receivables. Under
this paragraph (c), B’s basis is first assigned to the
distributed property to the extent of the partnership’s
basis in each distributed property. Thus, Asset X
and Asset Y are each assigned $150. Because the
aggregate adjusted basis of the distributed property,
$300, exceeds the basis to be allocated, $200, a decrease of $100 in the basis of the distributed property is required. Assets X and Y have unrealized depreciation of zero and $100, respectively. Thus, the
entire decrease is allocated to Asset Y. After the dis-

tribution, B has an adjusted basis of $150 in Asset X
and $50 in Asset Y.
Example 3. C, a partner in partnership PRS, receives a distribution in liquidation of its entire partnership interest of $6,000 cash, inventory items having an adjusted basis to the partnership of $6,000,
and real property having an adjusted basis to the
partnership of $4,000. C’s basis in its partnership
interest is $9,000. The cash distribution reduces C’s
basis to $3,000, which is allocated entirely to the inventory items. The real property has a zero basis in
C’s hands. The partnership bases not carried over to
C for the distributed properties are lost unless an
election under section 754 is in effect requiring the
partnership to adjust the bases of remaining partnership properties under section 734(b).
Example 4. Assume the same facts as in Example 3 of this paragraph except C receives a distribution in liquidation of its entire partnership interest of $1,000 cash and inventory items having a
basis to the partnership of $6,000. The cash distribution reduces C’s basis to $8,000, which can be
allocated only to the extent of $6,000 to the inventory items. The remaining $2,000 basis, not allocable to the distributed property, constitutes a capital loss to partner C under section 731(a)(2). If
the election under section 754 is in effect, see section 734(b) for adjustment of the basis of undistributed partnership property.

(5) Effective date. This paragraph
(c) applies to distributions of property
from a partnership that occur on or
after December 15, 1999.
(d) * * * (1) * * *
(ii) Where an election under section
754 is in effect, see section 743(b) and
§§1.743-1 and 1.732-2.
*****
(v) * * * (For a shift of transferee’s
basis adjustment under section 743(b)
to like property, see §1.743-1(g).)
(vi) The provisions of this paragraph
(d)(1) may be illustrated by the following example:
Example. (i) Transferee partner, T, purchased
a one-fourth interest in partnership PRS for
$17,000. At the time T purchased the partnership
interest, the election under section 754 was not in
effect and the partnership inventory had a basis to
the partnership of $14,000 and a fair market
value of $16,000. T’s purchase price reflected
$500 of this difference. Thus, $4,000 of the
$17,000 paid by T for the partnership interest was
attributable to T’s share of partnership inventory
with a basis of $3,500. Within 2 years after T acquired the partnership interest, T retired from the
partnership and received in liquidation of its entire partnership interest the following property:

Assets
Adjusted
Basis to
PRS

Fair
Market
Value

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1,500 . . . . . . . . . . . . . . . . . . . $1,500
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$3,500 . . . . . . . . . . . . . . . . . . . . $4,000
Asset X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$2,000 . . . . . . . . . . . . . . . . . . . . $4,000
Asset Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$4,000 . . . . . . . . . . . . . . . . . . . . $5,000
(ii) The fair market value of the inventory received by T was one-fourth of
the fair market value of all partnership
inventory and was T’s share of such
property. It is immaterial whether the
inventory T received was on hand when
T acquired the interest. In accordance
with T’s election under section 732(d),
the amount of T’s share of partnership
basis that is attributable to partnership
inventory is increased by $500 (onefourth of the $2,000 difference between
the fair market value of the property,
$16,000, and its $14,000 basis to the
partnership at the time T purchased its
interest). This adjustment under section

1999–52 I.R.B.

732(d) applies only for purposes of distributions to T, and not for purposes of
partnership depreciation, depletion, or
gain or loss on disposition. Thus, the
amount to be allocated among the properties received by T in the liquidating
distribution is $15,500 ($17,000, T’s
basis for the partnership interest, reduced by the amount of cash received,
$1,500). This amount is allocated as
follows: The basis of the inventory
items received is $4,000, consisting of
the $3,500 common partnership basis,
plus the basis adjustment of $500 which
T would have had under section 743(b).
The remaining basis of $11,500

707

($15,500 minus $4,000) is allocated
among the remaining property distributed to T by assigning to each property
the adjusted basis to the partnership of
such property and adjusting that basis
by any required increase or decrease.
Thus, the adjusted basis to T of Asset X
is $5,111 ($2,000, the adjusted basis of
Asset X to the partnership, plus $2,000,
the amount of unrealized appreciation
in Asset X, plus $1,111 ($4,000/$9,000
multiplied by $2,500)). Similarly, the
adjusted basis of Asset Y to T is $6,389
($4,000, the adjusted basis of Asset Y to
the partnership, plus $1,000, the amount
of unrealized appreciation in Asset Y,

December 27, 1999

plus, $1,389 ($5,000/$9,000 multiplied
by $2,500)).
*****
(4) * * *
(iii) A basis adjustment under section
743(b) would change the basis to the
transferee partner of the property actually
distributed.
(5) Required statements. If a transferee
partner notifies a partnership that it plans
to make the election under section 732(d)
under paragraph (d)(3) of this section, or
if a partnership makes a distribution to
which paragraph (d)(4) of this section applies, the partnership must provide the
transferee with such information as is
necessary for the transferee properly to
compute the transferee’s basis adjustments under section 732(d).
*****
Par. 3. Section 1.732-2 is amended by
revising the sentence at the end of the Example in paragraph (b) to read as follows:
§1.732-2 Special partnership basis of distributed property.
*****
(b) * * *
Example. * * * See §1.743-1(g).

*****
Par. 4. In §1.734-1, paragraph (e) is
added to read as follows:
§1.734-1 Optional adjustment to basis of
undistributed partnership property.
*****
(e) Recovery of adjustments to basis of
partnership property—(1) Increases in
basis. For purposes of section 168, if the
basis of a partnership’s recovery property
is increased as a result of the distribution
of property to a partner, then the increased
portion of the basis must be taken into account as if it were newly-purchased recovery property placed in service when
the distribution occurs. Consequently,
any applicable recovery period and
method may be used to determine the recovery allowance with respect to the increased portion of the basis. However, no
change is made for purposes of determining the recovery allowance under section
168 for the portion of the basis for which
there is no increase.
(2) Decreases in basis. For purposes of
section 168, if the basis of a partnership’s

December 27, 1999

recovery property is decreased as a result
of the distribution of property to a partner,
then the decrease in basis must be accounted for over the remaining recovery
period of the property beginning with
the recovery period in which the basis is
decreased.
(3) Effective date. This paragraph (e)
applies to distributions of property from
a partnership that occur on or after December 15, 1999.
Par. 5. Section 1.743-1 is revised to
read as follows:
§1.743-1 Optional adjustment to basis
of partnership property.
(a) Generally. The basis of partnership property is adjusted as a result of
the transfer of an interest in a partnership by sale or exchange or on the death
of a partner only if the election provided
by section 754 (relating to optional adjustments to the basis of partnership
property) is in effect with respect to the
partnership. Whether or not the election
provided in section 754 is in effect, the
basis of partnership property is not adjusted as the result of a contribution of
property, including money, to the partnership.
(b) Determination of adjustment. In
the case of the transfer of an interest in a
partnership, either by sale or exchange
or as a result of the death of a partner, a
partnership that has an election under
section 754 in effect—
(1) Increases the adjusted basis of
partnership property by the excess of the
transferee’s basis for the transferred
partnership interest over the transferee’s
share of the adjusted basis to the partnership of the partnership’s property; or
(2) Decreases the adjusted basis of
partnership property by the excess of the
transferee’s share of the adjusted basis
to the partnership of the partnership’s
property over the transferee’s basis for
the transferred partnership interest.
(c) Determination of transferee’s
basis in the transferred partnership interest. In the case of the transfer of a
partnership interest by sale or exchange
or as a result of the death of a partner,
the transferee’s basis in the transferred
partnership interest is determined under

708

section 742 and §1.742-1. See also section 752 and §§1.752-1 through 1.752-5.
(d) Determination of transferee’s
share of the adjusted basis to the partnership of the partnership’s property—
(1) Generally. A transferee’s share of
the adjusted basis to the partnership of
partnership property is equal to the sum
of the transferee’s interest as a partner in
the partnership’s previously taxed capital, plus the transferee’s share of partnership liabilities. Generally, a transferee’s interest as a partner in the
partnership’s previously taxed capital is
equal to—
(i) The amount of cash that the transferee would receive on a liquidation of
the partnership following the hypothetical transaction, as defined in paragraph
(d)(2) of this section (to the extent attributable to the acquired partnership interest); increased by
(ii) The amount of tax loss (including
any remedial allocations under §1.7043(d)), that would be allocated to the
transferee from the hypothetical transaction (to the extent attributable to the acquired partnership interest); and decreased by
(iii) The amount of tax gain (including any remedial allocations under
§1.704-3(d)), that would be allocated to
the transferee from the hypothetical
transaction (to the extent attributable to
the acquired partnership interest).
(2) Hypothetical transaction defined.
For purposes of paragraph (d)(1) of this
section, the hypothetical transaction
means the disposition by the partnership
of all of the partnership’s assets, immediately after the transfer of the partnership
interest, in a fully taxable transaction for
cash equal to the fair market value of the
assets.
(3) Examples. The provisions of this
paragraph (d) are illustrated by the following examples:
Example 1. (i) A is a member of partnership PRS
in which the partners have equal interests in capital
and profits. The partnership has made an election
under section 754, relating to the optional adjustment to the basis of partnership property. A sells its
interest to T for $22,000. The balance sheet of the
partnership at the date of sale shows the following:

1999–52 I.R.B.

Assets
Adjusted
Basis
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$5,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20,000
Depreciable assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$55,000

Fair
Market
Value
$5,000
10,000
21,000
40,000
$76,000

Liabilities and Capital
Adjusted
Per Books
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,000
Capital:
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,000
B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,000
C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$55,000

(ii) The amount of the basis adjustment under section 743(b) is the difference between the basis of T’s interest in
the partnership and T’s share of the adjusted basis to the partnership of the
partnership’s property. Under section
742, the basis of T’s interest is $25,333
(the cash paid for A’s interest, $22,000,
plus $3,333, T’s share of partnership liabilities). T’s interest in the partnership’s
previously taxed capital is $15,000
($22,000, the amount of cash T would
receive if PRS liquidated immediately
after the hypothetical transaction, decreased by $7,000, the amount of tax
gain allocated to T from the hypothetical
transaction). T’s share of the adjusted
basis to the partnership of the partnership’s property is $18,333 ($15,000
share of previously taxed capital, plus
$3,333 share of the partnership’s liabilities). The amount of the basis adjustment under section 743(b) to partnership
property therefore, is $7,000, the difference between $25,333 and $18,333.
Example 2. A, B, and C form partnership PRS,
to which A contributes land (Asset 1) with a fair
market value of $1,000 and an adjusted basis to A
of $400, and B and C each contribute $1,000 cash.
Each partner has $1,000 credited to it on the books
of the partnership as its capital contribution. The
partners share in profits equally. During the partnership’s first taxable year, Asset 1 appreciates in
value to $1,300. A sells its one-third interest in the

1999–52 I.R.B.

partnership to T for $1,100, when an election under
section 754 is in effect. The amount of tax gain
that would be allocated to T from the hypothetical
transaction is $700 ($600 section 704(c) built-in
gain, plus one-third of the additional gain). Thus,
T’s interest in the partnership’s previously taxed
capital is $400 ($1,100, the amount of cash T
would receive if PRS liquidated immediately after
the hypothetical transaction, decreased by $700,
T’s share of gain from the hypothetical transaction). The amount of T’s basis adjustment under
section 743(b) to partnership property is $700 (the
excess of $1,100, T’s cost basis for its interest, over
$400, T’s share of the adjusted basis to the partnership of partnership property).

(e) Allocation of basis adjustment. For
the allocation of the basis adjustment
under this section among the individual
items of partnership property, see section
755 and the regulations thereunder.
(f) Subsequent transfers. Where there
has been more than one transfer of a partnership interest, a transferee’s basis adjustment is determined without regard to
any prior transferee’s basis adjustment.
In the case of a gift of an interest in a partnership, the donor is treated as transferring, and the donee as receiving, that portion of the basis adjustment attributable to
the gifted partnership interest. The provisions of this paragraph (f) are illustrated
by the following example:
Example. (i) A, B, and C form partnership PRS.
A and B each contribute $1,000 cash, and C con-

709

Fair
Market
Value
$10,000
22,000
22,000
22,000
$76,000

tributes land with a basis and fair market value of
$1,000. When the land has appreciated in value to
$1,300, A sells its interest to T1 for $1,100 (onethird of $3,300, the fair market value of the partnership property). An election under section 754 is in
effect; therefore, T1 has a basis adjustment under
section 743(b) of $100.

(ii) After the land has further appreciated in value to $1,600, T1 sells its interest to T2 for $1,200 (one-third of $3,600,
the fair market value of the partnership
property). T2 has a basis adjustment
under section 743(b) of $200. This
amount is determined without regard to
any basis adjustment under section 743(b)
that T1 may have had in the partnership
assets.
(iii) During the following year, T2
makes a gift to T3 of fifty percent of
T2’s interest in PRS. At the time of the
transfer, T2 has a $200 basis adjustment
under section 743(b). T2 is treated as
transferring $100 of the basis adjustment to T3 with the gift of the partnership interest.
(g) Distributions—(1) Distribution of
adjusted property to the transferee—(i)
Coordination with section 732. If a partnership distributes property to a transferee
and the transferee has a basis adjustment
for the property, the basis adjustment is
taken into account under section 732. See
§1.732-2(b).

December 27, 1999

(ii) Coordination with section 734. For
certain adjustments to the common basis
of remaining partnership property after
the distribution of adjusted property to a
transferee, see §1.734-2(b).
(2) Distribution of adjusted property to
another partner— (i) Coordination with
section 732. If a partner receives a distribution of property with respect to which
another partner has a basis adjustment,
the distributee does not take the basis adjustment into account under section 732.
(ii) Reallocation of basis. A transferee
with a basis adjustment in property that is
distributed to another partner reallocates
the basis adjustment among the remaining

items of partnership property under
§1.755-1(c).
(3) Distributions in complete liquidation of a partner’s interest. If a transferee
receives a distribution of property
(whether or not the transferee has a basis
adjustment in such property) in liquidation of its interest in the partnership, the
adjusted basis to the partnership of the
distributed property immediately before
the distribution includes the transferee’s
basis adjustment for the property in which
the transferee relinquished an interest (either because it remained in the partnership or was distributed to another partner). Any basis adjustment for property

in which the transferee is deemed to relinquish its interest is reallocated among the
properties distributed to the transferee
under §1.755-1(c).
(4) Coordination with other provisions.
The rules of sections 704(c)(1)(B), 731,
737, and 751 apply before the rules of this
paragraph (g).
(5) Example. The provisions of this
paragraph (g) are illustrated by the following example:
Example. (i) A, B, and C are equal partners in
partnership PRS. Each partner originally contributed $10,000 in cash, and PRS used the contributions to purchase five nondepreciable capital assets.
PRS has no liabilities. After five years, PRS’s balance sheet appears as follows:

Assets
Adjusted
Basis

Fair
Market
Value

Asset 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,000
Asset 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4,000
Asset 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6,000
Asset 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7,000
Asset 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000

$10,000
6,000
6,000
4,000
13,000

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$30,000

$39,000
Capital

Adjusted
Per Books

Fair
Market
Value

Partner A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,000
Partner B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10,000
Partner C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000

$13,000
13,000
13,000

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$30,000

$39,000

(ii) A sells its interest to T for $13,000
when PRS has an election in effect under
section 754. T receives a basis adjustment under section 743(b) in the partner-

ship property that is equal to $3,000 (the
excess of T’s basis in the partnership interest, $13,000, over T’s share of the adjusted basis to the partnership of partner-

ship property, $10,000). The basis adjustment is allocated under section 755, and
the partnership’s balance sheet appears as
follows:
Assets

Adjusted
Basis

Fair
Market
Value

Asset 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,000
Asset 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4,000
Asset 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6,000
Asset 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7,000
Asset 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000

$10,000
6,000
6,000
4,000
13,000

0.00
666.67
0.00
(1,000.00)
3,333.33

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$30,000

$39,000

$3,000.00

December 27, 1999

710

Basis
Adjustment
$

1999–52 I.R.B.

Capital
Adjusted
Per Books

Fair
Market
Value

Special
Basis

Partner T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,000
Partner B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10,000
Partner C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000

$13,000
13,000
13,000

$3,000
0
0

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$30,000

$39,000

$3,000

(iii) Assume that PRS distributes Asset 2 to T in
partial liquidation of T’s interest in the partnership.
T has a basis adjustment under section 743(b) of
$666.67 in Asset 2. Under paragraph (g)(1)(i) of
this section, T takes the basis adjustment into account under section 732. Therefore, T will have a
basis in Asset 2 of $4,666.67 following the distribution.
(iv) Assume instead that PRS distributes Asset 5
to C in complete liquidation of C’s interest in PRS.
T has a basis adjustment under section 743(b) of
$3,333.33 in Asset 5. Under paragraph (g)(2)(i) of
this section, C does not take T’s basis adjustment
into account under section 732. Therefore, the partnership’s basis for purposes of sections 732 and 734
is $3,000. Under paragraph (g)(2)(ii) of this section,
T’s $3,333.33 basis adjustment is reallocated among
the remaining partnership assets under §1.755-1(c).
(v) Assume instead that PRS distributes Asset 5
to T in complete liquidation of its interest in PRS.
Under paragraph (g)(3) of this section, immediately
prior to the distribution of Asset 5 to T, PRS must
adjust the basis of Asset 5. Therefore, immediately
prior to the distribution, PRS’s basis in Asset 5 is
equal to $6,000, which is the sum of (A) $3,000,
PRS’s common basis in Asset 5, plus (B) $3,333.33,
T’s basis adjustment to Asset 5, plus (C) ($333.33),
the sum of T’s basis adjustments in Assets 2 and 4.
For purposes of sections 732 and 734, therefore,
PRS will be treated as having a basis in Asset 5
equal to $6,000.

(h) Contributions of adjusted property—(1) Section 721(a) transactions. If,
in a transaction described in section
721(a), a partnership (the upper tier) contributes to another partnership (the lower
tier) property with respect to which a
basis adjustment has been made, the basis
adjustment is treated as contributed to the
lower-tier partnership, regardless of
whether the lower-tier partnership makes
a section 754 election. The lower tier’s
basis in the contributed assets and the
upper tier’s basis in the partnership interest received in the transaction are determined with reference to the basis adjust-

1999–52 I.R.B.

ment. However, that portion of the basis
of the upper tier’s interest in the lower tier
attributable to the basis adjustment must
be segregated and allocated solely to the
transferee partner for whom the basis adjustment was made. Similarly, that portion of the lower tier’s basis in its assets
attributable to the basis adjustment must
be segregated and allocated solely to the
upper tier and the transferee. A partner
with a basis adjustment in property held
by a partnership that terminates under
section 708(b)(1)(B) will continue to have
the same basis adjustment with respect to
property deemed contributed by the terminated partnership to the new partnership under §1.708-1(b)(1)(iv), regardless
of whether the new partnership makes a
section 754 election.
(2) Section 351 transactions—(i) Basis
in transferred property. A corporation’s
adjusted tax basis in property transferred
to the corporation by a partnership in a
transaction described in section 351 is determined with reference to any basis adjustments to the property under section
743(b) (other than any basis adjustment
that reduces a partner’s gain under paragraph (h)(2)(ii) of this section).
(ii) Partnership gain. The amount of
gain, if any, recognized by the partnership
on a transfer of property by the partnership to a corporation in a transfer described in section 351 is determined without reference to any basis adjustment to
the transferred property under section
743(b). The amount of gain, if any, recognized by the partnership on the transfer
that is allocated to a partner with a basis
adjustment in the transferred property is
adjusted to reflect the partner’s basis adjustment in the transferred property.
(iii) Basis in stock. The partnership’s
adjusted tax basis in stock received from a
corporation in a transfer described in section 351 is determined without reference

711

to the basis adjustment in property transferred to the corporation in the section
351 exchange. A partner with a basis adjustment in property transferred to the
corporation, however, has a basis adjustment in the stock received by the partnership in the section 351 exchange in an
amount equal to the partner’s basis adjustment in the transferred property, reduced
by any basis adjustment that reduced the
partner’s gain under paragraph (h)(2)(ii)
of this section.
(iv) Example. The following example
illustrates the principles of this paragraph
(h):
Example. (i) A, B, and C are equal partners in
partnership PRS. The partnership’s only asset, Asset
1, has an adjusted tax basis of $60 and a fair market
value of $120. Asset 1 is a nondepreciable capital
asset and is not section 704(c) property. A has a
basis in its partnership interest of $40, and a positive
section 743(b) adjustment of $20 in Asset 1. In a
transaction to which section 351 applies, PRS contributes Asset 1 to X, a corporation, in exchange for
$15 in cash and X stock with a fair market value of
$105.
(ii) Under paragraph (h)(2)(ii) of this section,
PRS realizes $60 of gain on the transfer of Asset 1 to
X ($120, its amount realized, minus $60, its adjusted
basis), but recognizes only $15 of that gain under
section 351(b)(1). Of this amount, $5 is allocated to
each partner. A must use $5 of its basis adjustment
in Asset 1 to offset A’s share of PRS’s gain. Under
paragraph (h)(2)(iii) of this section, PRS’s basis in
the stock received from X is $60. However, A has a
basis adjustment in the stock received by PRS equal
to $15 (its basis adjustment in Asset 1, $20, reduced
by the portion of the adjustment which reduced A’s
gain, $5). Under paragraph (h)(2)(i) of this section,
X’s basis in Asset 1 equals $75 (PRS’s common
basis in the asset, $60, plus A’s basis adjustment
under section 743(b), $20, less the portion of the adjustment which reduced A’s gain, $5).

(i) [Reserved].
(j) Effect of basis adjustment—(1) In
general. The basis adjustment constitutes

December 27, 1999

an adjustment to the basis of partnership
property with respect to the transferee
only. No adjustment is made to the common basis of partnership property. Thus,
for purposes of calculating income, deduction, gain, and loss, the transferee will
have a special basis for those partnership
properties the bases of which are adjusted
under section 743(b) and this section.
The adjustment to the basis of partnership
property under section 743(b) has no effect on the partnership’s computation of
any item under section 703.
(2) Computation of partner’s distributive share of partnership items. The partnership first computes its items of income, deduction, gain, or loss at the
partnership level under section 703. The
partnership then allocates the partnership
items among the partners, including the
transferee, in accordance with section
704, and adjusts the partners’ capital accounts accordingly. The partnership then
adjusts the transferee’s distributive share
of the items of partnership income, deduction, gain, or loss, in accordance with
paragraphs (j)(3) and (4) of this section,
to reflect the effects of the transferee’s
basis adjustment under section 743(b).
These adjustments to the transferee’s distributive shares must be reflected on
Schedules K and K-1 of the partnership’s
return (Form 1065). These adjustments to
the transferee’s distributive shares do not
affect the transferee’s capital account.
(3) Effect of basis adjustment in determining items of income, gain, or loss—(i)
In general. The amount of a transferee’s
income, gain, or loss from the sale or exchange of a partnership asset in which the
transferee has a basis adjustment is equal
to the transferee’s share of the partnership’s gain or loss from the sale of the
asset (including any remedial allocations
under §1.704-3(d)), minus the amount of
the transferee’s positive basis adjustment
for the partnership asset (determined by
taking into account the recovery of the
basis adjustment under paragraph
(j)(4)(i)(B) of this section) or plus the
amount of the transferee’s negative basis
adjustment for the partnership asset (determined by taking into the account the
recovery of the basis adjustment under
paragraph (j)(4)(ii)(B) of this section).
(ii) Examples. The following examples
illustrate the principles of this paragraph
(j)(3):

December 27, 1999

Example 1. A and B form equal partnership PRS.
A contributes nondepreciable property with a fair
market value of $50 and an adjusted tax basis of
$100. PRS will use the traditional allocation method
under §1.704-3(b). B contributes $50 cash. A sells
its interest to T for $50. PRS has an election in effect to adjust the basis of partnership property under
section 754. T receives a negative $50 basis adjustment under section 743(b) that, under section 755, is
allocated to the nondepreciable property. PRS then
sells the property for $60. PRS recognizes a book
gain of $10 (allocated equally between T and B) and
a tax loss of $40. T will receive an allocation of $40
of tax loss under the principles of section 704(c).
However, because T has a negative $50 basis adjustment in the nondepreciable property, T recognizes a
$10 gain from the partnership’s sale of the property.
Example 2. A and B form equal partnership PRS.
A contributes nondepreciable property with a fair
market value of $100 and an adjusted tax basis of
$50. B contributes $100 cash. PRS will use the traditional allocation method under §1.704-3(b). A
sells its interest to T for $100. PRS has an election
in effect to adjust the basis of partnership property
under section 754. Therefore, T receives a $50 basis
adjustment under section 743(b) that, under section
755, is allocated to the nondepreciable property.
PRS then sells the nondepreciable property for $90.
PRS recognizes a book loss of $10 (allocated
equally between T and B) and a tax gain of $40. T
will receive an allocation of the entire $40 of tax
gain under the principles of section 704(c). However, because T has a $50 basis adjustment in the
property, T recognizes a $10 loss from the partnership’s sale of the property.
Example 3. A and B form equal partnership PRS.
PRS will make allocations under section 704(c)
using the remedial allocation method described in
§1.704-3(d). A contributes nondepreciable property
with a fair market value of $100 and an adjusted tax
basis of $150. B contributes $100 cash. A sells its
partnership interest to T for $100. PRS has an election in effect to adjust the basis of partnership property under section 754. T receives a negative $50
basis adjustment under section 743(b) that, under
section 755, is allocated to the property. The partnership then sells the property for $120. The partnership recognizes a $20 book gain and a $30 tax
loss. The book gain will be allocated equally between the partners. The entire $30 tax loss will be
allocated to T under the principles of section 704(c).
To match its $10 share of book gain, B will be allocated $10 of remedial gain, and T will be allocated
an offsetting $10 of remedial loss. T was allocated a
total of $40 of tax loss with respect to the property.
However, because T has a negative $50 basis adjustment to the property, T recognizes a $10 gain from
the partnership’s sale of the property.

712

(4) Effect of basis adjustment in determining items of deduction—(i)
Increases—(A) Additional deduction.
The amount of any positive basis adjustment that is recovered by the transferee in
any year is added to the transferee’s distributive share of the partnership’s depreciation or amortization deductions for the
year. The basis adjustment is adjusted
under section 1016(a)(2) to reflect the recovery of the basis adjustment.
(B) Recovery period—(1) In general.
Except as provided in paragraph
(j)(4)(i)(B)(2) of this section, for purposes of section 168, if the basis of a
partnership’s recovery property is increased as a result of the transfer of a
partnership interest, then the increased
portion of the basis is taken into account
as if it were newly-purchased recovery
property placed in service when the
transfer occurs. Consequently, any applicable recovery period and method
may be used to determine the recovery
allowance with respect to the increased
portion of the basis. However, no
change is made for purposes of determining the recovery allowance under
section 168 for the portion of the basis
for which there is no increase.
(2) Remedial allocation method. If a
partnership elects to use the remedial
allocation method described in §1.7043(d) with respect to an item of the partnership’s recovery property, then the
portion of any increase in the basis of
the item of the partnership’s recovery
property under section 743(b) that is attributable to section 704(c) built-in
gain is recovered over the remaining
recovery period for the partnership’s
excess book basis in the property as determined in the final sentence of
§1.704-3(d)(2). Any remaining portion
of the basis increase is recovered under
paragraph (j)(4)(i)(B)(1) of this section.
(C) Examples. The provisions of this
paragraph (j)(4)(i) are illustrated by the
following examples:
Example 1. (i) A, B, and C are equal partners in
partnership PRS, which owns Asset 1, an item of depreciable property that has a fair market value in excess of its adjusted tax basis. C sells its interest in
PRS to T while PRS has an election in effect under
section 754. PRS, therefore, increases the basis of
Asset 1 with respect to T.
(ii) Assume that in the year following the transfer

1999–52 I.R.B.

of the partnership interest to T, T’s distributive share

$500,000. B contributes $500,000 cash. When

$400,000 of section 704(c) built-in gain will,

of the partnership’s common basis depreciation de-

PRS is formed, the property has five years re-

therefore, be amortized under §1.704-3(d) over a

ductions from Asset 1 is $1,000. Also assume that,

maining in its recovery period. The partnership’s

10-year period beginning at the time of the part-

under paragraph (j)(4)(i)(B) of this section, the

adjusted basis of $100,000 will, therefore, be re-

nership’s formation.

amount of the basis adjustment under section 743(b)

covered over the five years remaining in the

that T recovers during the year is $500. The total

property’s recovery period. PRS elects to use the

(ii)(A)Except for the depreciation deductions,

amount of depreciation deductions from Asset 1 re-

remedial allocation method under §1.704-3(d)

PRS’s expenses equal its income in each year of

ported by T is equal to $1,500.

with respect to the property. If PRS had pur-

the first two years commencing with the year the

Example 2. (i) A and B form equal partnership

chased the property at the time of the partner-

partnership is formed. After two years, A’s share

PRS. A contributes property with an adjusted

ship’s formation, the basis of the property would

of the adjusted basis of partnership property is

basis of $100,000 and a fair market value of

have been recovered over a 10-year period. The

$120,000, while B’s is $440,000:

Capital Accounts
A
Initial
Contribution
Depreciation
Year 1
Remedial

Book

Tax

Book

Tax

$500,000

$100,000

$500,000

$500,000

(30,000)

(20,000)
(10,000)
470,000

(30,000)
470,000

Depreciation
Year 2
Remedial

10,000
110,000

470,000

(30,000)
$440,000

(B) A sells its interest in PRS to T for its fair market value of $440,000. A valid election under section 754 is in effect with respect to the sale of the
partnership interest. Accordingly, PRS makes an adjustment, pursuant to section 743(b), to increase the
basis of partnership property. Under section 743(b),
the amount of the basis adjustment is equal to
$320,000. Under section 755, the entire basis adjustment is allocated to the property.
(iii) At the time of the transfer, $320,000 of section 704(c) built-in gain from the property was still
reflected on the partnership’s books, and all of the
basis adjustment is attributable to section 704(c)
built-in gain. Therefore, the basis adjustment will be
recovered over the remaining recovery period for
the section 704(c) built-in gain under §1.704-3(d).

(ii) Decreases—(A) Reduced deduction. The amount of any negative basis
adjustment allocated to an item of depreciable or amortizable property that is recovered in any year first decreases the
transferee’s distributive share of the partnership’s depreciation or amortization deductions from that item of property for the
year. If the amount of the basis adjustment recovered in any year exceeds the
transferee’s distributive share of the partnership’s depreciation or amortization deductions from the item of property, then
the transferee’s distributive share of the

1999–52 I.R.B.

B

(30,000)
10,000
$120,000

$440,000

partnership’s depreciation or amortization
deductions from other items of partnership property is decreased. The transferee
then recognizes ordinary income to the
extent of the excess, if any, of the amount
of the basis adjustment recovered in any
year over the transferee’s distributive
share of the partnership’s depreciation or
amortization deductions from all items of
property.
(B) Recovery period. For purposes of
section 168, if the basis of an item of a
partnership’s recovery property is decreased as the result of the transfer of an
interest in the partnership, then the decrease is recovered over the remaining
useful life of the item of the partnership’s
recovery property. The portion of the decrease that is recovered in any year during
the recovery period is equal to the product
of—
(1) The amount of the decrease to the
item’s adjusted basis (determined as of
the date of the transfer); multiplied by
(2) A fraction, the numerator of which
is the portion of the adjusted basis of the
item recovered by the partnership in that
year, and the denominator of which is the
adjusted basis of the item on the date of
the transfer (determined prior to any basis

713

(20,000)
(10,000)
$440,000

adjustments).
(C) Examples. The provisions of this
paragraph (j)(4)(ii) are illustrated by the
following examples:
Example 1. (i) A, B, and C are equal partners in
partnership PRS, which owns Asset 2, an item of depreciable property that has a fair market value that is
less than its adjusted tax basis. C sells its interest in
PRS to T while PRS has an election in effect under
section 754. PRS, therefore, decreases the basis of
Asset 2 with respect to T.
(ii) Assume that in the year following the transfer
of the partnership interest to T, T’s distributive share
of the partnership’s common basis depreciation deductions from Asset 2 is $1,000. Also assume that,
under paragraph (j)(4)(ii)(B) of this section, the
amount of the basis adjustment under section 743(b)
that T recovers during the year is $500. The total
amount of depreciation deductions from Asset 2 reported by T is equal to $500.
Example 2. (i) A and B form equal partnership
PRS. A contributes property with an adjusted basis
of $100,000 and a fair market value of $50,000. B
contributes $50,000 cash. When PRS is formed, the
property has five years remaining in its recovery period. The partnership’s adjusted basis of $100,000
will, therefore, be recovered over the five years remaining in the property’s recovery period. PRS uses
the traditional allocation method under §1.704-3(b)
with respect to the property. As a result, B will re-

December 27, 1999

ceive $5,000 of depreciation deductions from the
property in each of years 1-5, and A, as the contributing partner, will receive $15,000 of depreciation deductions in each of these years.
(ii) Except for the depreciation deductions,
PRS’s expenses equal its income in each of the first
two years commencing with the year the partnership
is formed. After two years, A’s share of the adjusted
basis of partnership property is $70,000, while B’s is
$40,000. A sells its interest in PRS to T for its fair
market value of $40,000. A valid election under section 754 is in effect with respect to the sale of the
partnership interest. Accordingly, PRS makes an adjustment, pursuant to section 743(b), to decrease the
basis of partnership property. Under section 743(b),
the amount of the adjustment is equal to ($30,000).
Under section 755, the entire adjustment is allocated
to the property.
(iii) The basis of the property at the time of the
transfer of the partnership interest was $60,000. In
each of years 3 through 5, the partnership will realize depreciation deductions of $20,000 from the
property. Thus, one third of the negative basis adjustment ($10,000) will be recovered in each of
years 3 through 5. Consequently, T will be allocated, for tax purposes, depreciation of $15,000 each
year from the partnership and will recover $10,000
of its negative basis adjustment. Thus, T’s net depreciation deduction from the partnership in each
year is $5,000.
Example 3. (i) A, B, and C are equal partners in
partnership PRS, which owns Asset 2, an item of depreciable property that has a fair market value that is
less than its adjusted tax basis. C sells its interest in
PRS to T while PRS has an election in effect under
section 754. PRS, therefore, decreases the basis of
Asset 2 with respect to T.
(ii) Assume that in the year following the transfer
of the partnership interest to T, T’s distributive share
of the partnership’s common basis depreciation deductions from Asset 2 is $500. PRS allocates no
other depreciation to T. Also assume that, under
paragraph (j)(4)(ii)(B) of this section, the amount of
the negative basis adjustment that T recovers during
the year is $1,000. T will report $500 of ordinary income because the amount of the negative basis adjustment recovered during the year exceeds T’s distributive share of the partnership’s common basis
depreciation deductions from Asset 2.

(5) Depletion. Where an adjustment is
made under section 743(b) to the basis of
partnership property subject to depletion,
any depletion allowance is determined
separately for each partner, including the
transferee partner, based on the partner’s
interest in such property. See §1.7021(a)(8). For partnerships that hold oil and
gas properties that are depleted at the

December 27, 1999

partner
level
under
section
613A(c)(7)(D), the transferee partner
(and not the partnership) must make the
basis adjustments, if any, required under
section 743(b) with respect to such properties. See §1.613A-3(e)(6)(iv).
(6) Example. The provisions of paragraph (j)(5) of this section are illustrated
by the following example:
Example. A, B, and C each contributes $5,000
cash to form partnership PRS, which purchases a
coal property for $15,000. A, B, and C have equal
interests in capital and profits. C subsequently sells
its partnership interest to T for $100,000 when the
election under section 754 is in effect. T has a basis
adjustment under section 743(b) for the coal property of $95,000 (the difference between T’s basis,
$100,000, and its share of the basis of partnership
property, $5,000). Assume that the depletion allowance computed under the percentage method
would be $21,000 for the taxable year so that each
partner would be entitled to $7,000 as its share of the
deduction for depletion. However, under the cost
depletion method, at an assumed rate of 10 percent,
the allowance with respect to T’s one-third interest
which has a basis to him of $100,000 ($5,000, plus
its basis adjustment of $95,000) is $10,000, although
the cost depletion allowance with respect to the onethird interest of A and B in the coal property, each of
which has a basis of $5,000, is only $500. For partners A and B, the percentage depletion is greater
than cost depletion and each will deduct $7,000
based on the percentage depletion method. However, as to T, the transferee partner, the cost depletion method results in a greater allowance and T
will, therefore, deduct $10,000 based on cost depletion. See section 613(a).

(k) Returns—(1) Statement of adjustments—(i) In general. A partnership that
must adjust the bases of partnership properties under section 743(b) must attach a
statement to the partnership return for the
year of the transfer setting forth the name
and taxpayer identification number of the
transferee as well as the computation of
the adjustment and the partnership properties to which the adjustment has been
allocated.
(ii) Special rule. Where an interest is
transferred in a partnership which holds
oil and gas properties that are depleted at
the partner level under section
613A(c)(7)(D), the transferee must attach
a statement to the transferee’s return for
the year of the transfer, setting forth the
computation of the basis adjustment
under section 743(b) which is allocable to
such properties and the specific properties

714

to which the adjustment has been allocated.
(iii) Example. The provisions of paragraph (k)(1)(ii) of this section are illustrated by the following example:
Example. (i) Partnership XYZ owns a single section 613A(c)(7)(D) domestic oil and gas property
(Property) and other non-depletable assets. A, a
partner in XYZ with an adjusted tax basis in Property of $100 (excluding any prior adjustments under
section 743(b)), sells its partnership interest to B for
$800 cash. Under §1.613A-3(e)(6)(iv), A’s adjusted
basis of $100 in Property carries over to B.
(ii) Under section 755, XYZ determines that
Property accounts for 50% of the fair market value
of all partnership assets. The remaining 50% of B’s
purchase price ($400) is attributable to non-depletable property. XYZ must provide a statement to
B containing the portion of B’s adjusted basis attributable to non-depletable property ($400). Under this
paragraph (k)(1), XYZ must report basis adjustments under section 743(b) to non-depletable property. B must report basis adjustments under section
743(b) to Property.

(2) Requirement that transferee notify
partnership—(i) Sale or exchange. A
transferee that acquires, by sale or exchange, an interest in a partnership with
an election under section 754 in effect for
the taxable year of the transfer, must notify the partnership, in writing, within 30
days of the sale or exchange. The written
notice to the partnership must be signed
under penalties of perjury and must include the names and addresses of the
transferee and (if ascertainable) of the
transferor, the taxpayer identification
numbers of the transferee and (if ascertainable) of the transferor, the relationship
(if any) between the transferee and the
transferor, the date of the transfer, the
amount of any liabilities assumed or taken
subject to by the transferee, and the
amount of any money, the fair market
value of any other property delivered or to
be delivered for the transferred interest in
the partnership, and any other information
necessary for the partnership to compute
the transferee’s basis.
(ii) Transfer on death. A transferee that
acquires, on the death of a partner, an interest in a partnership with an election
under section 754 in effect for the taxable
year of the transfer, must notify the partnership, in writing, within one year of the
death of the deceased partner. The written
notice to the partnership must be signed
under penalties of perjury and must in-

1999–52 I.R.B.

clude the names and addresses of the deceased partner and the transferee, the taxpayer identification numbers of the deceased partner and the transferee, the
relationship (if any) between the transferee and the transferor, the deceased
partner’s date of death, the date on which
the transferee became the owner of the
partnership interest, the fair market value
of the partnership interest on the applicable date of valuation set forth in section
1014, and the manner in which the fair
market value of the partnership interest
was determined.
(iii) Nominee reporting. If a partnership interest is transferred to a nominee
which is required to furnish the statement
under section 6031(c)(1) to the partnership, the nominee may satisfy the notice
requirement contained in this paragraph
(k)(2) by providing the statement required
under §1.6031(c)-1T, provided that the
statement satisfies all requirements of
§1.6031(c)-1T and this paragraph (k)(2).
(3) Reliance. In making the adjustments under section 743(b) and any statement or return relating to such adjustments under this section, a partnership
may rely on the written notice provided
by a transferee pursuant to paragraph
(k)(2) of this section to determine the
transferee’s basis in a partnership interest.
The previous sentence shall not apply if
any partner who has responsibility for
federal income tax reporting by the partnership has knowledge of facts indicating
that the statement is clearly erroneous.
(4) Partnership not required to make or
report adjustments under section 743(b)
until it has notice of the transfer. A partnership is not required to make the adjustments under section 743(b) (or any statement or return relating to those
adjustments) with respect to any transfer
until it has been notified of the transfer.
For purposes of this section, a partnership
is notified of a transfer when either—
(i) The partnership receives the written
notice from the transferee required under
paragraph (k)(2) of this section; or
(ii) Any partner who has responsibility
for federal income tax reporting by the
partnership has knowledge that there has
been a transfer of a partnership interest.
(5) Effect on partnership of the failure
of the transferee to comply. If the transferee fails to provide the partnership
with the written notice required by para-

1999–52 I.R.B.

graph (k)(2) of this section, the partnership must attach a statement to its return
in the year that the partnership is otherwise notified of the transfer. This statement must set forth the name and taxpayer identification number (if
ascertainable) of the transferee. In addition, the following statement must be
prominently displayed in capital letters
on the first page of the partnership’s return for such year, and on the first page
of any schedule or information statement relating to such transferee’s share
of income, credits, deductions, etc.:
“RETURN FILED PURSUANT TO
§1.743-1(k)(5).” The partnership will
then be entitled to report the transferee’s
share of partnership items without adjustment to reflect the transferee’s basis
adjustment in partnership property. If,
following the filing of a return pursuant
to this paragraph (k)(5), the transferee
provides the applicable written notice to
the partnership, the partnership must
make such adjustments as are necessary
to adjust the basis of partnership property (as of the date of the transfer) in any
amended return otherwise to be filed by
the partnership or in the next annual
partnership return of income to be regularly filed by the partnership. At such
time, the partnership must also provide
the transferee with such information as
is necessary for the transferee to amend
its prior returns to properly reflect the
adjustment under section 743(b).
(l) Effective date. This section applies
to transfers of partnership interests that
occur on or after December 15, 1999.
Par. 6. Section 1.751-1 is amended by:
1. Revising paragraphs (a)(2) and
(a)(3).
2. Revising paragraph (c)(3).
3. Removing paragraph (c)(4)(x).
4. Adding a sentence at the end of paragraph (f).
5. Revising Example 1 of paragraph
(g).
The addition and revisions read as
follows:
§1.751-1 Unrealized receivables and
inventory items.
*****
(a) * * *
(2) Determination of gain or loss. The
income or loss realized by a partner upon
the sale or exchange of its interest in section 751 property is the amount of income

715

or loss from section 751 property (including any remedial allocations under
§1.704-3(d)) that would have been allocated to the partner (to the extent attributable to the partnership interest sold or exchanged) if the partnership had sold all of
its property in a fully taxable transaction
for cash in an amount equal to the fair
market value of such property (taking into
account section 7701(g)) immediately
prior to the partner’s transfer of the interest in the partnership. Any gain or loss
recognized that is attributable to section
751 property will be ordinary gain or loss.
The difference between the amount of
capital gain or loss that the partner would
realize in the absence of section 751 and
the amount of ordinary income or loss determined under this paragraph (a)(2) is the
transferor’s capital gain or loss on the sale
of its partnership interest.
(3) Statement required. A partner selling or exchanging any part of an interest
in a partnership that has any section 751
property at the time of sale or exchange
must submit with its income tax return for
the taxable year in which the sale or exchange occurs a statement setting forth
separately the following information—
(i) The date of the sale or exchange;
(ii) The amount of any gain or loss attributable to the section 751 property; and
(iii) The amount of any gain or loss attributable to capital gain or loss on the
sale of the partnership interest.
*****
(c) Unrealized receivables. * * *
(3) In determining the amount of the
sale price attributable to such unrealized
receivables, or their value in a distribution
treated as a sale or exchange, full account
shall be taken not only of the estimated
cost of completing performance of the
contract or agreement, but also of the time
between the sale or distribution and the
time of payment.
*****
(f) * * * The rules contained in paragraphs (a)(2) and (a)(3) of this section
apply to transfers of partnership interests
that occur on or after December 15, 1999.
(g) * * *
Example 1. (i)(A) A and B are equal partners in
personal service partnership PRS. B transfers its interest in PRS to T for $15,000 when PRS’s balance
sheet (reflecting a cash receipts and disbursements
method of accounting) is as follows:

December 27, 1999

Assets
Adjusted
Basis

Fair
Market
Value

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 3,000
Loans Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10,000
Capital Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7,000
Unrealized Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0

$ 3,000
10,000
5,000
14,000

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000

32,000

Liabilities and Capital
Adjusted
Per Books
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 2,000
Capital:
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9,000
B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000
Total
(B) None of the assets owned by PRS is section
704(c) property, and the capital assets are nondepreciable. The total amount realized by B is $16,000,
consisting of the cash received, $15,000, plus
$1,000, B’s share of the partnership liabilities assumed by T. See section 752. B’s undivided half-interest in the partnership property includes a half-interest in the partnership’s unrealized receivables
items. B’s basis for its partnership interest is
$10,000 ($9,000, plus $1,000, B’s share of partnership liabilities). If section 751(a) did not apply to
the sale, B would recognize $6,000 of capital gain
from the sale of the interest in PRS. However, section 751(a) does apply to the sale.
(ii) If PRS sold all of its section 751 property in a
fully taxable transaction immediately prior to the
transfer of B’s partnership interest to T, B would
have been allocated $7,000 of ordinary income from
the sale of PRS’s unrealized receivables. Therefore,
B will recognize $7,000 of ordinary income with respect to the unrealized receivables. The difference
between the amount of capital gain or loss that the
partner would realize in the absence of section 751
($6,000) and the amount of ordinary income or loss
determined under paragraph (a)(2) of this section
($7,000) is the transferor’s capital gain or loss on the
sale of its partnership interest. In this case, B will
recognize a $1,000 capital loss.

*****
Par. 7. Section 1.754-1 is amended as
follows:
1. Designate the text following the heading of paragraph (c) as paragraph (c)(1).

December 27, 1999

20,000
2. Add a heading to newly designated
paragraph (c)(1).
3. Add paragraph (c)(2).
The additions read as follows:
§1.754-1 Time and manner of making
election to adjust basis of partnership
property.
*****
(c) Revocation of election—(1) In general. * * *
(2) Revocations made for first taxable
year ending after December 15, 1999.
Notwithstanding paragraph (c)(1) of this
section, any partnership having an election in effect under this section for its taxable year that includes December 15,
1999 may revoke such election by attaching a statement to the partnership’s return
for such year. For the revocation to be
valid, the statement must be filed not later
than the time prescribed by §1.6031(a)1(e) (including extensions thereof) for filing the return for such taxable year, and
must set forth the name and address of the
partnership revoking the election, be
signed by any one of the partners who is
authorized to sign the partnership’s federal income tax return, and contain a declaration that the partnership revokes its
election under section 754 to apply the
provisions of section 734(b) and 743(b).
In addition, the following statement must
be prominently displayed in capital letters

716

Fair
Market
Value
$ 2,000
15,000
15,000
32,000
on the first page of the partnership’s return for such year: “RETURN FILED
PURSUANT TO §1.754-1(c)(2).”
Par. 8. Section 1.755-1 is revised to
read as follows:
§1.755-1 Rules for allocation of basis.
(a) Generally. A partnership that has
an election in effect under section 754
must adjust the basis of partnership property under the provisions of section
734(b) and section 743(b) pursuant to the
provisions of this section. The basis adjustment is first 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. The portion of
the basis adjustment allocated to each
class is then allocated among the items
within the class. Adjustments under section 743(b) are allocated under paragraph
(b) of this section. Adjustments under
section 734(b) are allocated under paragraph (c) of this section.
(b) Adjustments under section
743(b)—(1) Generally. (i) For ex-

1999–52 I.R.B.

changes 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, paragraph (b)(5) of this
section shall apply. For all other transfers which result in a basis adjustment
under section 743(b), paragraphs (b)(2)
through (b)(4) of this section shall apply.
Except as provided in paragraph (b)(5) of
this section, the portion of the basis adjustment allocated to one class of property may be an increase while the portion
allocated to the other class is a decrease.
This would be the case even though the
total amount of the basis adjustment is
zero. Except as provided in paragraph
(b)(5) of this section, the portion of the
basis adjustment allocated to one item of
property within a class may be an increase while the portion allocated to another is a decrease. This would be the
case even though the basis adjustment allocated to the class is zero.
(ii) Hypothetical transaction. For purposes of paragraphs (b)(2) through (b)(4)
of this section, the allocation of the basis
adjustment under section 743(b) between
the classes of property and among the
items of property within each class are

made based on the allocations of income,
gain, or loss (including remedial allocations under §1.704-3(d)) that the transferee partner would receive (to the extent
attributable to the acquired partnership interest) if, immediately after the transfer of
the partnership interest, all of the partnership’s property were disposed of in a fully
taxable transaction for cash in an amount
equal to the fair market value of such
property (the hypothetical transaction).
(2) Allocations between classes of
property—(i) In general. The amount of
the basis adjustment allocated to the class
of ordinary income property is equal to
the total amount of income, gain, or loss
(including any remedial allocations under
§1.704-3(d)) that would be allocated to
the transferee (to the extent attributable to
the acquired partnership interest) from the
sale of all ordinary income property in the
hypothetical transaction. The amount of
the basis adjustment to capital gain property is equal to—
(A) The total amount of the basis adjustment under section 743(b); less
(B) The amount of the basis adjustment
allocated to ordinary income property
under the preceding sentence; provided,

however, that in no event may the amount
of any decrease in basis allocated to capital gain property exceed the partnership’s
basis (or in the case of property subject to
the remedial allocation method, the transferee’s share of any remedial loss under
§1.704-3(d) from the hypothetical transaction) in capital gain property. In the event
that a decrease in basis allocated to capital
gain property would otherwise exceed the
partnership’s basis in capital gain property, the excess must be applied to reduce
the basis of ordinary income property.
(ii) Examples. The provisions of this
paragraph (b)(2) are illustrated by the following examples:
Example 1. (i) A and B form equal partnership
PRS. A contributes $50,000 and Asset 1, a nondepreciable capital asset with a fair market value of
$50,000 and an adjusted tax basis of $25,000. B
contributes $100,000. PRS uses the cash to purchase Assets 2, 3, and 4. After a year, A sells its interest in PRS to T for $120,000. At the time of the
transfer, A’s share of the partnership’s basis in partnership assets is $75,000. Therefore, T receives a
$45,000 basis adjustment.
(ii) Immediately after the transfer of the partnership interest to T, the adjusted basis and fair market
value of PRS’s assets are as follows:

Assets
Adjusted
Basis

Fair
Market
Value

Capital Gain Property:
Asset 1
Asset 2

$ 25,000
100,000

$ 75,000
117,500

Ordinary Income Property:
Asset 3
Asset 4

$ 40,000
10,000

$ 45,000
2,500

Total

$175,000

$240,000

(iii) If PRS sold all of its assets in a fully taxable transaction at fair market value immediately
after the transfer of the partnership interest to T,
the total amount of capital gain that would be allocated to T is equal to $46,250 ($25,000 section
704(c) built-in gain from Asset 1, plus fifty percent of the $42,500 appreciation in capital gain
property). T would also be allocated a $1,250 ordinary loss from the sale of the ordinary income
property.

1999–52 I.R.B.

(iv) The amount of the basis adjustment that is
allocated to ordinary income property is equal to
($1,250) (the amount of the loss allocated to T
from the hypothetical sale of the ordinary income
property).
(v) The amount of the basis adjustment that is
allocated to capital gain property is equal to
$46,250 (the amount of the basis adjustment,
$45,000, less ($1,250), the amount of loss allocated to T from the hypothetical sale of the ordi-

717

nary income property).
Example 2. (i) A and B form equal partnership
PRS. A and B each contribute $1,000 cash which
the partnership uses to purchase Assets 1, 2, 3, and
4. After a year, A sells its partnership interest to T
for $1,000. T’s basis adjustment under section
743(b) is zero.
(ii) Immediately after the transfer of the partnership interest to T, the adjusted basis and fair market
value of PRS’s assets are as follows:

December 27, 1999

Assets
Adjusted
Basis

Fair
Market
Value

Capital Gain Property:
Asset 1
Asset 2

$ 500
500

$ 750
500

Ordinary Income Property:
Asset 3
Asset 4
Total

$ 500
500
$2,000

$ 250
500
$2,000

(iii) If, immediately after the transfer of the partnership interest to T, PRS sold all of its assets in a
fully taxable transaction at fair market value, T
would be allocated a loss of $125 from the sale of
the ordinary income property. Thus, the amount of
the basis adjustment to ordinary income property is
($125). The amount of the basis adjustment to capital gain property is $125 (zero, the amount of the
basis adjustment under section 743(b), less ($125),
amount of the basis adjustment allocated to ordinary
income property).

(3) Allocation within the class—(i)
Ordinary income property. The amount
of the basis adjustment to each item of
property within the class of ordinary income property is equal to—
(A) The amount of income, gain, or
loss (including any remedial allocations
under §1.704-3(d)) that would be allocated to the transferee (to the extent attributable to the acquired partnership interest) from the hypothetical sale of the
item; reduced by
(B) The product of—
(1) Any decrease to the amount of the
basis adjustment to ordinary income property required pursuant to the last sentence
of paragraph (b)(2)(i) of this section; multiplied by
(2) A fraction, the numerator of which
is the fair market value of the item of
property to the partnership and the denominator of which is the total fair market
value of all of the partnership’s items of
ordinary income property.
(ii) Capital gain property. The amount
of the basis adjustment to each item of
property within the class of capital gain
property is equal to—
(A) The amount of income, gain, or
loss (including any remedial allocations
under §1.704-3(d)) that would be allocated to the transferee (to the extent attributable to the acquired partnership in-

December 27, 1999

terest) from the hypothetical sale of the
item; minus
(B) The product of—
(1) The total amount of gain or loss (including any remedial allocations under
§1.704-3(d)) that would be allocated to
the transferee (to the extent attributable to
the acquired partnership interest) from the
hypothetical sale of all items of capital
gain property, minus the amount of the
positive basis adjustment to all items of
capital gain property or plus the amount
of the negative basis adjustment to capital
gain property; multiplied by
(2) A fraction, the numerator of which
is the fair market value of the item of
property to the partnership, and the denominator of which is the fair market
value of all of the partnership’s items of
capital gain property.
(iii) Examples. The provisions of this
paragraph (b)(3) are illustrated by the following examples:
Example 1. (i) Assume the same facts as Example 1 in paragraph (b)(2)(ii) of this section. Of the
$45,000 basis adjustment, $46,250 was allocated to
capital gain property. The amount allocated to ordinary income property was ($1,250).
(ii) Asset 1 is a capital gain asset, and T would be
allocated $37,500 from the sale of Asset 1 in the hypothetical transaction. Therefore, the amount of the
adjustment to Asset 1 is $37,500.
(iii) Asset 2 is a capital gain asset, and T would
be allocated $8,750 from the sale of Asset 2 in the
hypothetical transaction. Therefore, the amount of
the adjustment to Asset 2 is $8,750.
(iv) Asset 3 is ordinary income property, and T
would be allocated $2,500 from the sale of Asset 3
in the hypothetical transaction. Therefore, the
amount of the adjustment to Asset 3 is $2,500.
(v) Asset 4 is ordinary income property, and T
would be allocated ($3,750) from the sale of Asset 4
in the hypothetical transaction. Therefore, the
amount of the adjustment to Asset 4 is ($3,750).

718

Example 2. (i) Assume the same facts as Example 1 in paragraph (b)(2)(ii) of this section, except
that A sold its interest in PRS to T for $110,000
rather than $120,000. T, therefore, receives a basis
adjustment under section 743(b) of $35,000. Of the
$35,000 basis adjustment, ($1,250) is allocated to
ordinary income property, and $36,250 is allocated
to capital gain property.
(ii) Asset 3 is ordinary income property, and T
would be allocated $2,500 from the sale of Asset 3
in the hypothetical transaction. Therefore, the
amount of the adjustment to Asset 3 is $2,500.
(iii) Asset 4 is ordinary income property, and T
would be allocated ($3,750) from the sale of Asset 4
in the hypothetical transaction. Therefore, the
amount of the adjustment to Asset 4 is ($3,750).
(iv) Asset 1 is a capital gain asset, and T would
be allocated $37,500 from the sale of Asset 1 in the
hypothetical transaction. Asset 2 is a capital gain
asset, and T would be allocated $8,750 from the sale
of Asset 2 in the hypothetical transaction. The total
amount of gain that would be allocated to T from the
sale of the capital gain assets in the hypothetical
transaction is $46,250, which exceeds the amount of
the basis adjustment allocated to capital gain property by $10,000. The amount of the adjustment to
Asset 1 is $33,604 ($37,500 minus $3,896 ($10,000
x $75,000/192,500)). The amount of the basis adjustment to Asset 2 is $2,646 ($8,750 minus $6,104
($10,000 x $117,500/192,500)).

(4) Income in respect of a decedent—
(i) In general. Where a partnership interest is transferred as a result of the
death of a partner, under section 1014(c)
the transferee’s basis in its partnership
interest is not adjusted for that portion
of the interest, if any, which is attributable to items representing income in respect of a decedent under section 691.
See §1.742-1. Accordingly, if a partnership interest is transferred as a result of
the death of a partner, and the partnership holds assets representing in

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A3b8d4d4f50bd7ebe. Public record. Not legal advice.