TAM 201929019: Deemed Partnership Distribution Treated as Exchange

In TAM 201929019, the deemed distribution of a partnership interest in an assets-over merger of two partnerships was treated as a Code Sec. 761(e) “exchange,” which required a mandatory Code Sec. 743(b) downward inside-basis adjustment when the resulting partnership had a substantial built-in loss. The issues presented and rulings made were as follows:

Issues:

1. Is a deemed distribution of a partnership interest in an assets-over merger of two partnerships under § 1.708-1(c)(3)(i) of the Income Tax Regulations (“regulations”) treated as an “exchange” pursuant to § 761(e) of the Internal Revenue Code (“Code”) that requires a mandatory downward inside-basis adjustment under § 743(b) when the resulting partnership has a substantial built- in loss?

2. If so, to what extent are the resulting partnership’s liabilities included in calculating a transferee partner’s adjusted basis in the transferred partnership interest and a transferee partner’s share of adjusted basis to the partnership of the resulting partnership’s property for purposes of § 1.743-1(c) and (d)(1)?

3. Is cancellation of indebtedness(“COD”) income that is deferred under §108(i) included in calculating a transferee partner’s share of adjusted basis to the partnership of partnership property for purposes of § 1.743-1(d)(1)?

CONCLUSIONS:

1. Yes, a deemed distribution of a partnership interest in an assets-over merger of two partnerships under § 1.708-1(c)(3)(i) is treated as an “exchange” pursuant to § 761(e) that requires a mandatory downward inside-basis adjustment under § 743(b) when the resulting partnership has a substantial built-in loss. 

2. In calculating a transferee partner’s adjusted basis in the transferred partnership interest and a transferee partner’s share of adjusted basis to the partnership of the resulting partnership’s property for purposes of § 1.743-1(c) and (d)(1), the resulting partnership’s liabilities are included in the transferee partner’s basis in the transferred partnership interest and the transferee partner’s share of the resulting partnership’s liabilities to the extent of the amount of gain that the transferee partner would recognize under § 731 after Step 1 of the assets-over merger absent the rule in § 1.752-1(f). 

No, deferred COD income under § 108(i) is not included in calculating a transferee partner’s share of adjusted basis to the partnership of partnership property for purposes of § 1.743-1(d)(1) because such amount is not “tax gain” within the meaning and for purposes of § 1.743-1(d)(1)(iii).

To see full TAM click TAM 201929019: Deemed Partnership Distribution Treated as Exchange.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal..

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