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TABLE 2.—SERVICE BULLETINS
For model

Airbus service bulletin

(1) A300–600 series airplanes .................................................................
(2) A300 B2 and B4 series airplanes .......................................................

Inspection and Related Investigative/
Corrective Actions
(g) Within 18 months or 1,500 flight cycles
from the effective date of this AD, whichever
occurs first: Do a detailed inspection of the
skin panels of the wing slats for damage and
certain repairs, and do all applicable related
investigative/corrective actions, by
accomplishing all the actions in the
applicable service bulletin. Do the actions in
accordance with the service bulletin, except
as required by paragraphs (h) and (i) of this
AD. Do any related investigative/corrective
action before further flight.
Note 1: For the purposes of this AD, a
detailed inspection is ‘‘an intensive visual
examination of a specific structural area,
system, installation, or assembly to detect
damage, failure, or irregularity. Available
lighting is normally supplemented with a
direct source of good lighting at intensity
deemed appropriate by the inspector.
Inspection aids such as mirror, magnifying
lenses, etc., may be used. Surface cleaning
and elaborate access procedures may be
required.’’
Differences Between AD and Service Bulletin
(h) If any damage is detected during the
inspection required by paragraph (g) of this
AD, and the service bulletin recommends
contacting Airbus for appropriate action:
Before further flight, repair in accordance
with a method approved by either the
Manager, International Branch, ANM–116,
FAA, Transport Airplane Directorate; or the
Direction Ge´ ne´ rale de l’Aviation Civile
(DGAC) (or its delegated agent).
(i) If any repair that has a specific Airbus
approval other than an Repair Approval
Sheet signed by the DGAC (or its delegated
agent) is found during the inspection
required by paragraph (g) of this AD, and the
service bulletin specifies that the related
investigative action is not necessary: Before
further flight, do the applicable related
investigative/corrective actions required by
paragraph (g) of this AD.
(j) Where there are differences between this
AD and the service bulletin, the AD prevails.
Alternative Methods of Compliance
(AMOCs)
(k) The Manager, International Branch,
ANM–116, has the authority to approve
AMOCs for this AD, if requested using the
procedures found in 14 CFR 39.19.
Related Information
(l) French airworthiness directive 2003–
086(B), effective March 15, 2003, also
addresses the subject of this AD.

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A300–57–6092, Revision 02, dated November 21, 2002.
A300–57–0238, Revision 02, dated November 21, 2002.

Issued in Renton, Washington, on July 8,
2004.
Kevin M. Mullin,
Acting Manager, Transport Airplane
Directorate, Aircraft Certification Service.
[FR Doc. 04–16029 Filed 7–14–04; 8:45 am]
BILLING CODE 4910–13–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–150562–03]
RIN 1545–BC67

Section 1045 Application to
Partnerships
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
AGENCY:

SUMMARY: This document contains
proposed regulations relating to the
application of section 1045 of the
Internal Revenue Code (Code) to
partnerships and their partners. These
regulations provide rules regarding the
deferral of gain on a partnership’s sale
of qualified small business stock and
deferral of gain on a partner’s sale of
qualified small business stock
distributed by a partnership. The
proposed regulations affect partnerships
that invest in qualified small business
stock and their partners. This document
also provides notice of a public hearing
on the proposed regulations.
DATES: Written or electronic comments
and requests to speak and outlines of
topics to be discussed at the public
hearing scheduled for Tuesday,
November 2, 2004, at 10 a.m. must be
received by October 11, 2004.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–150562–03), Room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand
delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–150562–03),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue,
NW., Washington, DC, or sent
electronically, via the IRS Internet site
at: www.irs.gov/regs or via the Federal

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eRulemaking Portal at
www.regulations.gov (IRS and REG–
150562–03). The public hearing will be
held in the IRS Auditorium, Internal
Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
Charlotte Chyr, (202) 622–3070, or Jian
H. Grant, (202) 622–3050; concerning
submissions, the hearing, and/or
placement on the building access list to
attend the hearing, Sonya Cruse, (202)
622–4693 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information
contained in this notice of proposed
rulemaking has been submitted to the
Office of Management and Budget for
review in accordance with the
Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the
collection of information should be sent
to the Office of Management and
Budget, Attn: Desk Officer for the
Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503, with copies to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP Washington, DC
20224. Comments on the collection of
information should be received no later
than September 13, 2004. Comments are
specifically requested concerning:
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the
Internal Revenue Service, including
whether the information will have
practical utility;
The accuracy of the estimated burden
associated with the proposed collection
of information (see below);
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with
the proposed collection of information
can be minimized, including through
the application of automated collection
techniques or other forms of information
technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance,
and purchase of services to provide
information.
The collection of information in this
proposed regulation is in § 1.1045–

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Federal Register / Vol. 69, No. 135 / Thursday, July 15, 2004 / Proposed Rules
1(b)(4)(ii). This information is required
to inform the IRS of partnerships and
partners making the section 1045
election. The collection of information
is required to obtain a benefit, that is,
to elect to apply section 1045 treatment
for qualified small business stock that is
sold by the partnership. This
information will be used by the partner
to permit the partner to defer its
allocable share of gain on the
partnership’s sale of qualified small
business stock and by partnerships to
make necessary adjustments to the basis
of replacement qualified small business
stock. The likely respondents are
individuals, businesses or other forprofit institutions, and small businesses
or organizations.
The estimated burden for the
collection of information in § 1.1045–
1(b)(4)(ii) is as follows:
Estimated total annual reporting
burden: 1,000 hours.
The estimated annual burden per
respondent varies from 45 to 75
minutes, depending on individual
circumstances, with an estimated
average of 1 hour.
Estimated number of respondents:
1000.
Estimated annual frequency of
responses: On occasion.
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 OMB control number
assigned by the Office of Management
and Budget.
Books or records relating to a
collection 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
Section 1045 and section 1202 both
provide for special treatment of gain on
the sale of QSB stock held by noncorporate taxpayers. Under section 1202
of the Internal Revenue Code (Code), a
taxpayer other than a corporation (a
non-corporate taxpayer) excludes 50
percent of gain on the sale of qualified
small business (QSB) stock (as defined
in section 1202(c)) from gross income if
the taxpayer holds the stock for more
than five years. Section 1045 permits a
non-corporate taxpayer that holds QSB
stock (relinquished QSB stock) for more
than six months and sells it after August
5, 1997, to elect to defer recognizing
gain on the sale. To qualify for such
deferral, the taxpayer must purchase
QSB stock (replacement QSB stock)

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within a 60-day period beginning on the
date of the sale of the relinquished QSB
stock. Any gain not recognized reduces
the cost basis of the replacement QSB
stock. Section 1045(b)(3). The taxpayer
recognizes gain to the extent the amount
realized on the sale of the relinquished
QSB stock exceeds the cost basis of the
replacement QSB stock. Section 1045(a).
Section 1045 does not apply to any gain
treated as ordinary income. Id.
Section 6005(f)(2) of the Internal
Revenue Service Restructuring and
Reform Act of 1998, Public Law 105–
206 (112 Stat. 6005(f)(2)), July 22, 1998,
(the 1998 Act) added section 1045(b)(5).
That section provides that rules similar
to the rules in section 1202 (f), (g), (h),
(i), (j), and (k) apply for purposes of
section 1045. The legislative history
accompanying the 1998 Act provides
that the benefit of deferred recognition
of gain with respect to the sale of QSB
stock by a partnership will flow through
to a partner who is not a corporation if
the partner held the partnership interest
at all times the partnership held the
QSB stock. See H.R. Conf. Rep. 105–599,
105th Cong., 2d Sess. 339 (1998). The
legislative history further provides that
there are no limitations on the types of
partners that a partnership may have in
order for the benefits of section 1045 to
apply. Id. at 340.
Under section 1202(g), a noncorporate taxpayer applies section 1202
to the taxpayer’s share of a passthrough
entity’s gain from the sale of QSB stock
if two requirements are met. First, the
passthrough entity must have held the
QSB stock for more than five years.
Second, the taxpayer must have held an
interest in the passthrough entity on the
date the passthrough entity acquired the
QSB stock and at all times thereafter
before the disposition of the stock. For
purposes of section 1202, passthrough
entities include partnerships, S
corporations, regulated investment
companies (RICs), and common trust
funds. Section 1202(g)(4).
QSB stock must generally be acquired
by the taxpayer at its original issue.
However, section 1202(h) provides that,
in the case of certain transfers of QSB
stock, the transferee is treated as having
acquired such stock in the same manner
as the transferor and as having held
such stock during any continuous
period immediately preceding the
transfer during which it was held by the
transferor. Section 1202(h) applies to
transfers from a partnership to a partner
of stock with respect to which
requirements similar to the
requirements of section 1202(g) are met
at the time of the transfer (without
regard to the 5-year holding period

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requirement) as well as to transfers by
gift or at death.
The committee reports underlying the
enactment of section 1202 explain that,
under section 1202(h),
[q]ualified small business stock * * * may
be distributed by a partnership to one or
more of its partners, as long as (1) all
eligibility requirements with respect to
qualified small business stock are met, and
(2) the partner held its interest in the
partnership on the date the partnership
acquired the stock and at all times thereafter
and before the disposition of the stock. In
addition, a partner cannot treat stock
distributed by a partnership as qualified
small business stock to the extent that the
partner’s share of the stock distributed by the
partnership exceeded the partner’s interest in
the partnership at the time the partnership
acquired the stock.

H.R. Rep. No. 103–111, 103d Cong., lst
Sess. 602 (1993).
The committee report goes on to
explain that transferees in cases not
described in section 1202(h) are not
eligible for partial exclusion of gain
under section 1202(a). Thus, for
example, if qualified small business
stock is transferred to a partnership and
the partnership disposes of the stock,
any gain from the disposition will not
be eligible for the exclusion. Id.
Rev. Proc. 98–48 (1998–2 C.B. 367)
generally provides procedures for
taxpayers (including passthrough
entities and individuals holding
interests in a passthrough entity) to elect
to apply section 1045. The background
section of the revenue procedure
explains that, under section 1045(b)(5),
a passthrough entity that sells QSB
stock held for more than 6 months may
make a section 1045 election if the
entity purchases replacement QSB stock
during the 60-day period beginning on
the date of the sale. Section 2.03, Rev.
Proc. 98–48. The benefit of the section
1045 election flows through to a noncorporate taxpayer that held an interest
in the passthrough entity for as long as
the entity held the QSB stock. The
background section of the revenue
procedure also explains that, under
section 1045(b)(5), if a passthrough
entity sells QSB stock held for more
than six months, a non-corporate
taxpayer who has held an interest in the
entity during the period in which the
entity held the QSB stock and who
purchases replacement QSB stock
during the 60-day statutory period may
elect to apply section 1045 to the noncorporate taxpayer’s share of any gain
on the sale that the entity does not defer
under section 1045. Section 2.03, Rev.
Proc. 98–48.
Since Rev. Proc. 98–48 was
published, the IRS and Treasury

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Department have received inquiries
regarding the application of section
1045 to partnerships and their partners.
In response to these inquiries, the
proposed regulations provide rules
relating to sales and purchases of
interests in a partnership that owns QSB
stock, partnership dispositions of QSB
stock, partnership distributions of QSB
stock, and contributions of QSB stock to
a partnership. Partners and partnerships
wishing to elect section 1045 must
continue to follow the procedures of
Rev. Proc. 98–48 for rules regarding the
time and manner for making the
election, the scope of the election, and
revocation of the election.
Explanation of Provisions
A. General Rules and Definitions
1. QSB Stock
Section 1045(b)(1) provides that the
term QSB stock has the same meaning
given such term by section 1202(c).
Section 1202(c) provides that the term
QSB stock is any stock in a C
corporation that is originally issued
after the date of the enactment of the
Revenue Reconciliation Act of 1993, if
(A) as of the date of issuance, the
corporation is a qualified small
business, and (B) except as provided in
section 1202(f) and (h), the stock is
acquired by the taxpayer at its original
issue in exchange for money or other
property (not including stock), or as
compensation for services provided to
the corporation.
Some taxpayers have asked if a
partner may treat a sale of a partnership
interest as a sale of QSB stock or an
acquisition of a partnership interest as
an acquisition of QSB stock. Sections
1045 and 1202 do not adopt a lookthough approach to the sale and
acquisition of partnership interests.
Under the plain language of section
1202(c), an investment in a partnership
that holds or purchases QSB stock is not
treated as an investment in QSB stock.
This plain language interpretation is
further supported by the structure of
sections 1045 and 1202. Congress
clearly contemplated partnership
transactions when enacting section
1202, as several of its provisions address
such transactions. In light of this,
Congress’s failure to provide for section
1202(a) treatment for acquisitions and
dispositions of partnership interests
appears to have been intentional. Such
a decision by Congress would be
consistent with the approach taken by
section 1202(g). That section allows
partners to qualify for section 1202(a)
treatment with respect to gain
recognized by reason of holding a
partnership interest only if the partner

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held the interest in the partnership on
the date of the partnership’s acquisition
of QSB stock and at all times thereafter
before the disposition of the stock by the
partnership. If a partner were to sell its
partnership interest while the
partnership still held QSB stock, then
the partner would not have held the
partnership interest from the date of the
acquisition of that stock until the date
of the disposition of the stock by the
partnership. For these reasons, the
proposed regulations provide that the
term QSB stock does not include an
interest in a partnership that holds or
purchases QSB stock.
2. Eligible Partner
Under the proposed regulations, only
an eligible partner may defer gain
recognized by a partnership on the sale
of QSB stock. Consistent with section
1202(g) and (h), the proposed
regulations define an eligible partner as
a non-corporate partner who held an
interest in the partnership at all times
that the partnership held the QSB stock
or a non-corporate partner who acquired
an interest in a partnership from an
existing eligible partner by gift or death.
The proposed regulations provide
special rules for determining eligible
partners if a partnership (upper-tier
partnership) holds an interest in a
partnership (lower-tier partnership) that
holds QSB stock. The proposed rules
disregard the upper-tier partnership’s
ownership of the lower-tier partnership
and treat each partner of the upper-tier
partnership as owning the interest in the
lower-tier partnership directly. A
partner of the upper-tier partnership is
treated as owning an interest in the
lower-tier partnership during the period
in which both the partner of the uppertier partnership held an interest in the
upper-tier partnership and the uppertier partnership held an interest in the
lower-tier partnership.
The IRS and the Treasury Department
are concerned that, although the current
look-through treatment for tiered
partnerships may be the simplest
approach, the application of the
proposed rules presents the following
potential problems: (1) The proposed
rules prohibit an upper-tier partnership
from making a section 1045 election at
the partnership level; (2) the eligible
partners of the upper-tier partnership
may not have the necessary information
to benefit from the proposed rules; and
(3) notification from the lower-tier
partnership to the upper-tier
partnerships and their partners and vice
versa may be difficult if multiple tiers
of partnerships are involved.
Accordingly, the IRS and Treasury
Department request comments

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specifically on the application of the
proposed rules with respect to tiered
partnerships.
3. Nonrecognition Limitation
Under the proposed regulations, the
amount of gain that an eligible partner
may defer under section 1045 (whether
the election to apply section 1045 is
made at the partnership or the partner
level) may not exceed: (A) The partner’s
smallest percentage interest in the
partnership’s income, gain, or loss with
respect to the relinquished QSB stock,
multiplied by (B) the partnership’s
realized gain from the sale of such stock.
For this purpose, the partnership’s
realized gain from the sale of the QSB
stock is determined without regard to
any basis adjustment under section
734(b) or 743(b). This rule follows
section 1202(g)(2) and (3) by ensuring
that the partner can defer recognition of
only the gain that relates to the partner’s
continuous economic interest in the
relinquished QSB stock.
B. Partnership Election Under Section
1045
1. General Rule
Consistent with Rev. Proc. 98–48, the
proposed regulations allow a
partnership to elect to apply section
1045 if the partnership held QSB stock
for more than six months, sold such
QSB stock, and purchased other QSB
stock (replacement QSB stock) within
60 days of the sale. If the partnership
makes an election under section 1045,
all eligible partners of the partnership
must defer their distributive shares of
the partnership section 1045 gain from
the partnership’s sale of the QSB stock.
No separate election is required of the
partners. Partnership section 1045 gain
equals the partnership’s gain from the
sale of the QSB stock reduced by the
greater of: (A) The gain from the sale of
the QSB stock that is treated as ordinary
income, or (B) the excess of the amount
realized by the partnership on the sale
over the cost of any replacement QSB
stock purchased by the partnership
during the 60-day period beginning on
the date of the sale.
2. Election Procedures and Notification
The proposed regulations require the
partnership to make the section 1045
election on the partnership’s timely
filed return (including extensions) for
the taxable year during which the
partnership sells the QSB stock. In
addition, the partnership must follow
the procedures of Rev. Proc. 98–48.
When a partnership makes the
election, the proposed regulations
require the partnership to notify all

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partners that it has made the election,
and separately state each partner’s
distributive share of the partnership
section 1045 gain under section 702.
Each partner must determine if it is an
eligible partner and report the partner’s
distributive share of gain, including gain
not recognized, on Schedule D of the
partner’s Federal income tax return.
C. Partner Election Under Section 1045
1. General Rule
Also consistent with Rev. Proc. 98–48,
the proposed regulations allow an
eligible partner to make a section 1045
election with respect to the partner’s
share of gain from the partnership’s sale
of QSB stock if the partnership does not
make a section 1045 election or
purchase replacement QSB stock within
the statutory time period. The election
may be made if the partnership either
replaces none of the relinquished QSB
stock or replaces some but not all of the
relinquished QSB stock. For example,
relinquished QSB stock can be partially
replaced by the partnership and
partially replaced by the partner if
section 1045 elections are made by both
the partnership and the partner. If a
partner makes a section 1045 election,
the partner recognizes its distributive
share of the gain from the sale of the
relinquished QSB stock only to the
extent of the greater of: (1) The gain that
is treated as ordinary income, or (2) the
excess of the partner’s share of the
amount realized by the partnership on
the sale of the QSB stock over the cost
of any replacement QSB stock
purchased by the partner during the 60day statutory period.
A partnership that has sold QSB stock
should promptly notify its partners
when it does not intend to make a
section 1045 election with respect to the
sale. Prompt notification will allow
partners who intend to make separate
section 1045 elections time to purchase
replacement QSB stock within 60 days
of the sale of the relinquished QSB stock
and to make timely section 1045
elections. However, the proposed
regulations do not impose a requirement
on partnerships to provide such
notification. The IRS and Treasury
Department believe that it is more
appropriate for the partners to decide
(for example, in the partnership
agreement) whether, and to what extent,
the partnership must provide such
notification.
2. Election Procedures
The proposed regulations provide that
a partner making an election under
section 1045 with respect to its
distributive share of gain on the

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partnership’s sale of QSB stock must do
so on the partner’s timely filed federal
income tax return (including
extensions) for the taxable year in which
such gain is taken into account. In
addition, the partner must follow the
procedures of Rev. Proc. 98–48.
D. Basis Adjustments
The proposed regulations provide
rules regarding adjustments to the
eligible partner’s basis in the
partnership interest and the
partnership’s basis in the replacement
QSB stock. Under these rules, if the
partnership makes a section 1045
election, then the eligible partner may
not increase its outside basis by the
amount of gain that is not recognized
under section 1045. In addition, the
partnership is required to reduce its
basis in the replacement QSB stock by
the amount of gain that is not
recognized by its partners. The
adjustment to the partnership’s inside
basis in the replacement QSB stock is
similar to a basis adjustment under
section 743(b). These rules are necessary
to preserve (in the replacement QSB
stock and the partnership interest) the
deferred gain on the sale of the
relinquished QSB stock.
As explained above, a partner’s basis
in a partnership interest is not increased
by any gain that is deferred by reason
of a partnership section 1045 election.
In contrast, a partner’s basis in a
partnership interest is increased by any
gain that is deferred by reason of a
partner section 1045 election. A partner
must reduce the basis of any
replacement QSB stock the partner
purchases by the amount of gain that is
not recognized by reason of a partner
section 1045 election.
To allow the partnership to make the
appropriate adjustments to the basis of
the replacement QSB stock, the
proposed regulations require any
partner who recognizes all or part of the
partner’s distributive share of
partnership section 1045 gain to notify
the partnership of the amount of the
partnership section 1045 gain that was
recognized. In the absence of
notification, the partnership must
presume that the partner deferred
recognition of the partnership section
1045 gain and decrease its basis in the
replacement QSB stock by the partner’s
distributive share of partnership section
1045 gain until such time as the partner
provides notification of the amount
recognized by the partner. However, if
the partnership knows that one of its
partners was, during any period in
which the partnership held the QSB
stock, classified as a corporation for
federal tax purposes, then the

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partnership may presume that the
partner did not defer recognition of the
partnership section 1045 gain even in
the absence of a notification by the
partner.
E. Distribution of QSB Stock
Consistent with section 1202(h) and
the legislative history underlying that
section, the proposed regulations
provide that, if a partnership distributes
QSB stock to an eligible partner, then
the eligible partner is treated as having
acquired such stock in the same manner
as the partnership and having held such
stock during any continuous period
immediately preceding the distribution
during which it was held by the
partnership. However, the amount of
gain on the sale of such distributed QSB
stock that the partner can defer cannot
exceed the distribution nonrecognition
limitation. For this purpose, the
distribution nonrecognition limitation is
equal to the partner’s section 1045
amount realized, reduced by the
partner’s section 1045 adjusted basis.
The proposed regulations provide rules
for determining the partner’s section
1045 amount realized and the partner’s
section 1045 adjusted basis in the case
of a liquidating distribution, a
nonliquidating distribution of all of the
QSB stock (of the same type), and other
nonliquidating distributions.
These rules follow the legislative
history’s directive that a partner may
not treat stock distributed by a
partnership as QSB stock to the extent
that the partner’s share of the
distributed stock exceeds the partner’s
interest in the partnership at the time
the partnership acquired the stock.
Under the proposed regulations, the
amount of gain that a distributee partner
may defer on the sale of distributed QSB
stock will be no more than (but in the
case of QSB stock received in certain
nonliquidating distributions may be less
than) the amount of gain that the partner
would have been able to defer in the
absence of the distribution.
The IRS and Treasury Department
considered an alternative approach for
determining the distribution
nonrecognition limitation for sales of
QSB stock following a nonliquidating
distribution to a partner. Under this
alternative approach, the distribution
nonrecognition limitation would be
determined by reference to the
maximum amount of gain that the
partner would have been able to defer
if the partnership had not distributed
any QSB stock of the type sold, but
instead had sold all of that QSB stock
for a per share price equal to the per
share price received on the actual sale
of the distributed QSB stock by the

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partner. Due to the complexity of this
alternative approach, it was rejected and
is not included in the proposed
regulations. The IRS and Treasury
Department request comments on the
extent to which refinements of the
distribution nonrecognition limitation
applicable to sales of distributed QSB
stock are appropriate.
F. Contribution of QSB Stock
The proposed regulations provide that
a contribution of QSB stock to a
partnership in a transaction to which
section 721(a) applies does not cause
the contributing partner to recognize
any gain that was previously deferred
under section 1045. However, the QSB
stock, once contributed, is no longer
QSB stock in the hands of the
partnership because the partnership has
not acquired the stock at original issue
within the meaning of section
1202(c)(1)(B). See also H.R. Rep. No.
103–111, 103d Cong., 1st Sess. 602
(1993).
G. Proposed Effective Date
The regulations are proposed to apply
to sales of QSB stock on or after the date
final regulations are published in the
Federal Register.
Effect on Other Documents
The following publication will be
amplified for partners and partnerships
beginning on or after the date these
regulations are published as final
regulations in the Federal Register:
Rev. Proc. 98–48 (1998–2 C.B. 367).
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant regulatory action as defined
in Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations. It is hereby
certified that the collection of
information in these regulations will not
have a significant economic impact on
a substantial number of small entities.
This certification is based upon the fact
that QSB stock is not held by a
substantial number of small entities and
that the time required to make the
election is estimated to average 1 hour.
Therefore, a Regulatory Flexibility
Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is
not required. Pursuant to section 7805(f)
of the Code, this notice of proposed
rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.

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Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
written (a signed original and eight (8)
copies) or electronic comments that are
submitted timely to the IRS. The IRS
and Treasury Department request
comments on the clarity of the proposed
rules and how they can be made easier
to understand. All comments will be
available for public inspection and
copying.
A public hearing has been scheduled
for Tuesday, November 2, 2004, at 10
a.m. in the IRS Auditorium, Internal
Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC. Due to
building security procedures, visitors
must enter at the Constitution Avenue
entrance. In addition, all visitors must
present photo identification to enter the
building. Because of access restrictions,
visitors will not be admitted beyond the
immediate entrance area more than 15
minutes before the hearing starts. For
information about having your name
placed on the building access list to
attend the hearing, see the FOR FURTHER
INFORMATION CONTACT section of this
preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish
to present oral comments at the hearing
must submit written or electronic
comments and an outline of the topics
to be discussed and the time to be
devoted to each topic (signed original
and eight (8) copies) by October 11,
2004. A period of 10 minutes will be
allotted to each person for making
comments. An agenda showing the
scheduling of the speakers will be
prepared after the deadline for receiving
outlines has passed. Copies of the
agenda will be available free of charge
at the hearing.
Drafting Information
The principal authors of these
regulations are Charlotte Chyr and Jian
H. Grant, Office of the Associate Chief
Counsel (Passthroughs and Special
Industries). However, other personnel
from the IRS and Treasury Department
participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes,
Excise taxes, Gift taxes, Income taxes,
Penalties, Reporting and recordkeeping
requirements.

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Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read, in part, as
follows:
Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.1045–1 is added to
read as follows:
§ 1.1045–1

Application to partnerships.

(a) General rules—(1) Definition of
QSB stock—In general. For purposes of
section 1045 and this section, qualified
small business stock (QSB stock) has the
meaning provided in section 1202(c).
For purposes of section 1045 and this
section, the term QSB stock does not
include an interest in a partnership that
purchases or holds QSB stock. (For
further guidance, see Example 1 and
Example 2 of paragraph (g) of this
section.)
(2) Eligible partner—(i) In general. For
purposes of this section, an eligible
partner with respect to QSB stock is a
taxpayer other than a corporation who
holds an interest in a partnership on the
date the partnership acquires the QSB
stock and at all times thereafter before
the partnership sells or distributes the
QSB stock.
(ii) Acquisition by gift or at death. For
purposes of this section, a taxpayer who
acquires from an eligible partner by gift
or at death an interest in a partnership
that holds QSB stock is treated as
having held the acquired interest in the
partnership during the period the
eligible partner held the interest in the
partnership. (For further guidance, see
Example 6 of paragraph (g) of this
section.)
(iii) Tiered partnership—(A)
Generally. If a partnership (upper-tier
partnership), holds an interest in
another partnership (lower-tier
partnership) that holds QSB stock, then,
for purposes of this paragraph (a)(2), the
upper-tier partnership’s ownership of
the lower-tier partnership is ignored and
each partner of the upper-tier
partnership is treated as owning the
interest in the lower-tier partnership
directly. The partner of the upper-tier
partnership is treated as owning the
interest in the lower-tier partnership
during the period in which both—
(1) The partner of the upper-tier
partnership held an interest in the
upper-tier partnership; and
(2) The upper-tier partnership held an
interest in the lower-tier partnership.
(For further guidance, see Example 3 of
paragraph (g) of this section.)

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(B) Multiple tiers of partnership.
Principles similar to those described in
paragraph (a)(2)(iii)(A) of this section
apply where a taxpayer holds the
interest in the lower-tier partnership
through multiple tiers of partnerships.
(3) Nonrecognition limitation—(i) In
general. For purposes of this section, the
amount of gain that an eligible partner
does not recognize under paragraphs
(b)(1) and (c)(1) of this section cannot
exceed the nonrecognition limitation.
For this purpose, the nonrecognition
limitation is equal to the product of—
(A) The partnership’s realized gain
from the sale of the QSB stock,
determined without regard to any basis
adjustment under section 734(b) or
743(b) (other than basis adjustments
described in paragraph (b)(3)(ii) of this
section); and
(B) The eligible partner’s smallest
percentage interest in the partnership’s
income, gain, or loss with respect to the
QSB stock that was sold. (For further
guidance, see Example 4 of paragraph
(g) of this section.)
(ii) Eligible partner’s smallest
percentage interest. In determining an
eligible partner’s smallest percentage
interest in the partnership’s income,
gain, or loss with respect to QSB stock,
reductions in the partner’s interest that
occur solely as a result of a distribution
of QSB stock to the partner are not taken
into account.
(b) Partnership election—(1) General
rule. A partnership that holds QSB stock
for more than six months, sells such
QSB stock, and purchases other QSB
stock (replacement QSB stock), within
60 days beginning on the date of the sale
may elect to apply section 1045. For
purposes of this paragraph (b)(1), a
purchase of replacement QSB stock by
a partner is not treated as a purchase of
replacement QSB stock by the
partnership. If the partnership elects to
apply section 1045, then, subject to the
provisions of paragraph (a)(3) of this
section, each eligible partner does not
recognize the partner’s distributive
share of any partnership section 1045
gain. For this purpose, partnership
section 1045 gain equals the
partnership’s gain from the sale of the
QSB stock reduced by the greater of—
(i) The amount of the gain from the
sale of the QSB stock that is treated as
ordinary income; or
(ii) The excess of the amount realized
by the partnership on the sale over the
cost of any replacement QSB stock
purchased by the partnership during the
60-day period beginning on the date of
the sale (excluding the cost of any
replacement QSB stock that is otherwise
taken into account under section 1045).

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(2) Partner’s share of partnership
section 1045 gain. A partnership must
allocate partnership section 1045 gain to
the partners in the same proportion as
the partnership’s entire gain from the
sale of the QSB stock is allocated to the
partners. For this purpose, the
partnership’s gain from the sale of QSB
stock and the partner’s distributive
share of that gain are determined
without regard to basis adjustments
under section 743(b) and paragraph
(b)(3)(ii) of this section.
(3) Basis adjustments—(i) Partner’s
interest in a partnership.
Notwithstanding section 705(a)(1), the
adjusted basis of a partner’s interest in
a partnership is not increased by gain
from a partnership’s sale of QSB stock
that is not recognized by the partner
under paragraph (b)(1) of this section.
(ii) Partnership’s replacement QSB
stock. The basis of a partnership’s
replacement QSB stock is reduced (in
the order acquired) by the amount of
gain from the partnership’s sale of QSB
stock that is not recognized by an
eligible partner. The basis adjustment
with respect to any amount described in
this paragraph (b)(3)(ii) constitutes an
adjustment to the basis of the
partnership’s replacement QSB stock
with respect to that partner only. The
effect of such a basis adjustment is
determined under the principles of
§ 1.743–1(g), (h), and (j). For purposes of
this paragraph (b)(3)(ii), the partnership
must presume that a partner did not
recognize that partner’s distributive
share of QSB gain until such time as the
partner provides to the partnership the
notification described in paragraph
(b)(4)(ii) of this section. However, if the
partnership knows that a particular
partner is classified, for Federal tax
purposes, as a corporation during any
period in which the partnership held
the QSB stock, then the partnership may
presume that the partner did not defer
recognition of the partnership section
1045 gain, even in the absence of a
notification by the partner.
(4) Notice requirements—(i)
Partnership notification to partners. A
partnership that makes the election
described in paragraph (b)(1) of this
section must notify all of its partners of
the election in accordance with the
applicable forms and instructions and
separately state each partner’s
distributive share of gain from the sale
of QSB stock under section 702. Each
partner shall determine whether the
partner is an eligible partner within the
meaning of paragraph (b)(1) of this
section and report the partner’s
distributive share of gain from the
partnership’s sale of QSB stock,
including gain not recognized, on

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42375

Schedule D of the partner’s federal
income tax return.
(ii) Partner notification to
partnership. Any partner that must
recognize all or part of the partner’s
distributive share of partnership section
1045 gain must notify the partnership,
in writing, of the amount of partnership
section 1045 gain that is recognized by
the partner. (For further guidance
concerning paragraph (b) of this section,
see Example 4 through Example 7 of
paragraph (g) of this section.)
(c) Partner election—(1) In general. If
an eligible partner of a partnership that
sells QSB stock purchases replacement
QSB stock during the 60-day period
beginning on the date of the
partnership’s sale of the QSB stock, then
the partner may elect to apply section
1045. For purposes of this paragraph
(c)(1), a purchase of replacement QSB
stock by the partnership is not treated
as a purchase of replacement QSB stock
by a partner. An eligible partner that
elects to apply section 1045 must
recognize its distributive share of gain
from the partnership’s sale of QSB stock
only to the extent of the greater of—
(i) The amount of the partner’s
distributive share of the gain from the
sale of the QSB stock that is treated as
ordinary income; or
(ii) The excess of the partner’s share
of the amount realized by the
partnership on the sale of the QSB stock
(excluding any QSB stock that was
replaced by the partnership) over the
cost of any replacement QSB stock
purchased by the partner during the 60day period beginning on the date of the
partnership’s sale of the QSB stock
(excluding the cost of any replacement
QSB stock that is otherwise taken into
account under section 1045).
(2) Partner’s share of amount realized
by partnership. The partner’s share of
the amount realized by the partnership
shall bear the same proportion to the
amount realized by the partnership on
the sale of the QSB stock (excluding the
cost of any replacement QSB stock) as
the partner’s distributive share of the
partnership’s realized gain from the sale
of the QSB stock bears to the
partnership’s realized gain on the sale of
the QSB stock. For this purpose, the
partnership’s realized gain from the sale
of QSB stock and the partner’s
distributive share of that gain are
determined without regard to basis
adjustments under section 743(b) and
paragraph (b)(3)(ii) of this section.
(3) Basis adjustments—(i) Partner’s
interest in a partnership. Under section
705(a)(1), the adjusted basis of a
partner’s interest in a partnership is
increased by the amount of gain that is
not recognized by an eligible partner

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Federal Register / Vol. 69, No. 135 / Thursday, July 15, 2004 / Proposed Rules

pursuant to paragraph (c)(1) of this
section.
(ii) Partner’s replacement QSB stock.
A partner’s basis in any replacement
QSB stock that is purchased by the
partner during the 60-day period
described in paragraph (c)(1) of this
section must be reduced (in the order
acquired) by the partner’s distributive
share of the gain on the sale of the
partnership’s QSB stock that is not
recognized by the partner pursuant to
paragraph (c)(1) of this section. (For
further guidance concerning this
paragraph (c), see Example 8 through
Example 10 of paragraph (g) of this
section.)
(d) Partnership distribution of QSB
stock to an eligible partner—(1) In
general. Subject to paragraphs (d)(2) and
(3) of this section, in the case of a
partnership distribution of QSB stock to
an eligible partner within the meaning
of paragraph (a)(2) of this section, the
eligible partner shall be treated as—
(i) Having acquired such stock in the
same manner as the partnership; and
(ii) Having held such stock during any
continuous period immediately
preceding the distribution during which
it was held by the partnership. (For
further guidance concerning this
paragraph (d), see Example 11 and
Example 12 of paragraph (g) of this
section.)
(2) Eligibility under section 1202(c).
Paragraph (d)(1) of this section does not
apply unless all eligibility requirements
with respect to the QSB stock as defined
in section 1202(c) are met by the
distributing partnership with respect to
its investment in the QSB stock.
(3) Distribution nonrecognition
limitation—(i) Generally. The amount of
gain that an eligible partner does not
recognize on the sale of QSB stock (the
relinquished QSB stock) that was
distributed by the partnership to the
partner cannot exceed the distribution
nonrecognition limitation. For this
purpose, the nonrecognition limitation
is—
(A) The partner’s section 1045 amount
realized; reduced by
(B) The partner’s section 1045
adjusted basis.
(ii) Section 1045 amount realized—
(A) QSB stock received in liquidation of
partner’s interest and in certain
nonliquidating distributions. If a partner
receives relinquished QSB stock from
the partnership in a distribution in
liquidation of the partner’s interest in
the partnership or as part of a series of
related distributions by the partnership
in which the partnership distributes all
of the partnership’s QSB stock of a
particular type, then the partner’s
section 1045 amount realized is the

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partner’s amount realized from the sale
of the relinquished QSB stock,
multiplied by a fraction—
(1) The numerator of which is the
partner’s smallest percentage interest
(prior to the distribution) in the
partnership’s income, gain, or loss with
respect to the type of QSB stock sold by
the partner; and
(2) The denominator of which is the
partner’s percentage interest in that type
of partnership QSB stock immediately
after the distribution (determined under
paragraph (d)(3)(iv) of this section).
(B) QSB stock received in other
distributions. If a partner receives
relinquished QSB stock in a distribution
from the partnership that is not
described in paragraph (d)(3)(ii)(A) of
this section, the partner’s section 1045
amount realized is the partner’s amount
realized from the sale of the
relinquished QSB stock multiplied by
the partner’s smallest interest (prior to
the distribution) in the partnership’s
income, gain, or loss with respect to
such stock.
(iii) Section 1045 adjusted basis—(A)
QSB stock received in liquidation of
partner’s interest and in certain
nonliquidating distributions. If a partner
receives relinquished QSB stock from
the partnership in a distribution in
liquidation of the partner’s interest in
the partnership or as part of a series of
related distributions by the partnership
in which the partnership distributes all
of the partnership’s QSB stock of a
particular type, then the partner’s
section 1045 adjusted basis is the
product of—
(1) The partnership’s basis in all of
the QSB stock of the type distributed
(without regard to basis adjustments
under section 734(b) or 743(b), other
than basis adjustments described in
paragraph (b)(3)(ii) of this section);
(2) The partner’s smallest interest
(prior to the distribution) in the
partnership’s income, gain, or loss with
respect to such stock; and
(3) The proportion of the distributed
QSB stock that was sold by the partner.
(B) QSB stock received in other
distributions. If a partner receives
relinquished QSB stock in a distribution
from the partnership that is not
described in paragraph (d)(3)(iii)(A) of
this section, the partner’s section 1045
adjusted basis is the product of—
(1) The partnership’s basis in the QSB
stock sold by the partner (without
regard to basis adjustments under
section 734(b) or 743(b), other than basis
adjustments described in paragraph
(b)(3)(ii) of this section); and
(2) The partner’s smallest interest
(prior to the distribution) in the

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partnership’s income, gain, or loss with
respect to such stock.
(iv) Partner’s percentage interest in
distributed QSB stock. For purposes of
this paragraph (d)(3), a partner’s
percentage interest in a type of QSB
stock immediately after a partnership
distribution is the value (as of the date
of the distribution) of the QSB stock
distributed to the partner divided by the
value (as of the date of the distribution)
of all of that type of QSB stock that was
acquired by the partnership.
(v) QSB stock of the same type. For
purposes of this paragraph (d)(3), QSB
stock will be of the same type as the
distributed QSB stock if it has the same
issuer and the same rights and
preferences as the distributed QSB stock
and was acquired by the partnership at
its original issue.
(e) Contribution of QSB stock or
replacement QSB stock to a partnership.
Section 721 applies to a contribution of
QSB stock to a partnership by a taxpayer
other than a corporation. Except as
provided in section 721(b), any gain that
was not recognized by the taxpayer
under section 1045 is not recognized
when the taxpayer contributes QSB
stock to a partnership in exchange for a
partnership interest in the hands of the
taxpayer. Stock that is contributed to a
partnership is not QSB stock in the
hands of the partnership because the
partnership did not acquire the stock at
original issue. (For further guidance, see
Example 13 of paragraph (g) of this
section.)
(f) Time and manner of making
election. A partnership making an
election under section 1045 (as
described under paragraph (b)(1) of this
section) must do so on the partnership’s
timely filed (including extensions)
return for the taxable year during which
the sale of QSB stock occurs. A partner
making an election under section 1045
(as described under paragraph (c)(1) of
this section) must do so on the partner’s
timely filed (including extensions)
Federal income tax return for the
taxable year during which the partner’s
distributive share of the partnership’s
gain from the sale of the QSB stock is
taken into account under section 706. In
addition, a partnership or partner
making an election under section 1045
must follow the administrative
procedures issued for making such
elections. (For further guidance, see
Rev. Proc. 98–48 (1998–2 C.B. 367) and
§ 601.601(d)(2)(ii)(b) of this chapter.)
(g) Examples. The provisions of this
section are illustrated by the following
examples:
Example 1. Acquisition of a partnership
interest as replacement property. On January

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1, 2006, A, an individual, X, a corporation,
and Y, a corporation, form PRS, a
partnership. A, X, and Y each contribute $25
to PRS and agree to share all partnership
items equally. PRS purchases QSB stock on
February 1, 2006, and subsequently sells the
QSB stock on November 4, 2006, for $150.
PRS realizes $75 of gain from the sale of the
QSB stock (none of which is treated as
ordinary income) and allocates $25 of gain to
each of A, X, and Y. On November 30, 2006,
A contributes $50 to ABC, a partnership, in
exchange for an interest in ABC (instead of
purchasing QSB stock). ABC then purchases
QSB stock for $50 on December 1, 2006. A’s
acquisition of the additional partnership
interest is not treated as a purchase of
replacement QSB stock for purposes of
section 1045.
Example 2. Sale of a partnership interest.
The facts are the same as in Example 1,
except that PRS does not sell its QSB stock.
Instead, on November 4, 2006, A sells the
PRS interest for $50x, realizing $25 of capital
gain. On November 30, 2006, A purchases
$50 of new QSB stock. Under paragraph
(a)(1) of this section, the sale of an interest
in a partnership that holds QSB stock is not
treated as a sale of QSB stock. Therefore, A
may not elect to apply section 1045 with
respect to A’s $25 of gain from the sale of the
PRS interest.
Example 3. Eligible and non-eligible
partners of tiered partnership. On January 1,
2006, A, an individual, and B, an individual,
contribute cash to UTP, (upper-tier
partnership) for equal partnership interests.
On February 1, 2006, UTP and C, an
individual, contribute cash to LTP, (lowertier partnership) for equal partnership
interests. On March 1, 2006, LTP purchases
QSB stock. On April 1, 2006, D, an
individual, joins UTP by contributing cash to
UTP for a 1/3 interest in UTP. On December
1, 2006, LTP sells the QSB stock. Under
paragraph (a)(2)(iii) of this section, A, B, and
D are treated as owning an interest in LTP
during the period in which each of the
partners held an interest in UTP and UTP
held an interest in LTP. Therefore, under
paragraph (a)(2)(i) of this section, A and B are
eligible partners, and D is not an eligible
partner.
Example 4. Partnership sale of QSB stock
and purchase and sale of replacement QSB
stock. (i) Assume the same facts as in
Example 1, except that PRS purchases
replacement QSB stock for $135 on December
15, 2006. On its timely filed return for the
taxable year during which the sale of the
relinquished QSB stock occurs, PRS makes
an election to apply section 1045. PRS knows
that X and Y are corporations. On March 30,
2007, PRS sells the replacement QSB stock
for $165. PRS realizes $30 of capital gain
from the sale of the replacement QSB stock
and allocates $10 of gain to each of A, X, and
Y.
(ii) Under paragraph (b)(1) of this section,
the partnership section 1045 gain is $60 ($75
gain less $15 ($150 amount realized on the
sale of the relinquished QSB stock less $135
cost of the replacement QSB stock)). This
amount must be allocated among the partners
in the same proportions as the entire gain
from the sale of the QSB stock is allocated

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to the partners, 1⁄3 ($20) to A, 1⁄3 ($20) to X,
and 1⁄3 ($20) to Y.
(iii) Because neither X nor Y are eligible
partners under paragraph (a)(2) of this
section, X and Y must each recognize its $25
distributive share of partnership gain from
the sale of the QSB stock. Because A is an
eligible partner under paragraph (a)(2) of this
section, and because A is bound by the
election by PRS to apply section 1045, A
defers recognition of A’s $20 distributive
share of partnership section 1045 gain. A is
not required to separately elect to apply
section 1045. A must recognize A’s
remaining $5 distributive share of the
partnership’s gain from the sale of the QSB
stock.
(iv) Under section 705(a)(1)(A), the
adjusted bases of X’s and Y’s interests in PRS
are each increased by $25. Under section
705(a)(1)(A) and paragraph (b)(3)(i) of this
section, the adjusted basis of A’s interest in
PRS is not increased by the $20 of
partnership section 1045 gain that was not
recognized by A, but is increased by A’s
remaining $5 distributive share of gain.
(v) PRS must decrease its basis in the
replacement QSB stock by the $20 of
partnership section 1045 gain that was
allocated to A. This basis reduction is a
reduction with respect to A only. PRS then
adjusts A’s distributive share of gain from the
sale of the replacement QSB stock to reflect
the effect of A’s basis adjustment under
paragraph (b)(3)(ii) of this section. In
accordance with the principles of § 1.743–
1(j)(3), the amount of A’s gain from the sale
of the replacement QSB stock in which A has
a $20 negative basis adjustment equals $30
(A’s share of PRS’s gain from the sale of the
replacement QSB stock ($10), increased by
the amount of A’s negative basis adjustment
for the replacement stock ($20)).
Accordingly, upon the sale of the
replacement QSB stock, A recognizes $30 of
gain, and X and Y each recognize $10 of gain.
Example 5. Sale of partnership interest
while partnership holds QSB stock. Assume
the same facts as in Example 4, except that
A sells A’s interest in PRS to B, an
individual, on March 1, 2006. B is not an
eligible partner under paragraph (a)(2)(i) of
this section, because B did not hold an
interest in PRS on the date PRS originally
acquired the QSB stock. Therefore, B must
recognize B’s distributive share of
partnership section 1045 gain.
Example 6. Death of partner while
partnership holds QSB stock. Assume the
same facts as in Example 4, except that A
dies on March 1, 2006, and B inherits A’s
interest in PRS. Under paragraph (a)(2)(ii) of
this section, B is treated as holding the
interest in PRS during the period that A held
the interest in PRS. Therefore, B is an eligible
partner under paragraph (a)(2)(i) of this
section. Accordingly, B defers recognition of
B’s distributive share of the partnership
section 1045 gain on the sale of the QSB
stock.
Example 7. Partnership sale of QSB stock
and partner purchase of replacement QSB
stock. (i) Assume the same facts as in
Example 4, except that PRS does not make
an election under section 1045 with respect
to the sale of the QSB stock. On November

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42377

30, 2006, A, an eligible partner under
paragraph (a)(2) of this section, purchases
replacement QSB stock for $50. A elects to
apply section 1045 on A’s timely filed return
for the taxable year that A is required to
include A’s distributive share of PRS’s gain
from the sale of the relinquished QSB stock.
(ii) Under paragraph (c)(2) of this section,
A’s share of the amount realized from PRS’s
sale of the QSB stock is $50 (the amount
which bears the same proportion to the total
amount realized by the partnership on the
sale of the QSB stock ($150) as A’s share of
the gain from the sale of the QSB stock ($25)
bears to the total gain realized by the
partnership on the sale of the QSB stock
($75)). Because A purchased, within 60 days
of PRS’s sale of the QSB stock, replacement
QSB stock for a cost equal to A’s share of the
partnership’s amount realized on the sale of
the QSB stock, and because A made a valid
election to apply section 1045, A defers
recognition of A’s $25 distributive share of
gain from PRS’s sale of the QSB stock. Under
section 705(a)(1) and paragraph (c)(3)(i) of
this section, the adjusted basis of A’s interest
in PRS is increased by $25. Under paragraph
(c)(3)(ii) of this section, A’s basis in the
replacement QSB stock is $25 ($50 cost
minus $25 nonrecognition amount).
Example 8. Election by partner;
replacement by partnership. Assume the
same facts as in Example 7, except that PRS
purchases replacement QSB stock on
December 31, 2006, but does not make an
election to apply section 1045. A makes an
election to apply section 1045, but does not
purchase any replacement QSB stock during
the 60-day period beginning on the date of
PRS’s sale of the QSB stock. Because the
requirements of neither paragraph (b)(1) nor
paragraph (c)(1) of this section has been
satisfied, A must recognize all of A’s
distributive share of the gain from PRS’s sale
of the QSB stock.
Example 9. Partial replacement by
partnership; partial replacement by partner.
(i) On January 1, 2006, A, an individual, and
X, a corporation, form PRS, a partnership. A
and X each contribute $50 to PRS and agree
to share all partnership items equally. PRS
purchases QSB stock on February 1, 2006, for
$100 and subsequently sells the QSB stock
on January 31, 2008, for $300. PRS realizes
$200 of gain from the sale of the QSB stock
(none of which is treated as ordinary income)
and allocates $100 of gain to each of A and
X. On February 10, 2008, PRS purchases
replacement QSB stock for $220. On March
20, 2008, A purchases replacement QSB
stock for $40. Both A and PRS make valid
elections to apply section 1045.
(ii) Under paragraph (b)(1) of this section,
partnership section 1045 gain is $120 ($200
less $80 ($300 amount realized on the sale of
the relinquished QSB stock minus $220 cost
of the replacement QSB stock)). This amount
is allocated among the partners in the same
proportions as the entire gain from the sale
of the QSB stock is allocated to the partners,
1⁄2 to A ($60), and 1⁄2 to X ($60). Because A
is an eligible partner, A defers recognition of
A’s $60 distributive share of partnership
section 1045 gain.
(iii) A also made a valid section 1045
election and purchased, within 60 days of

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Federal Register / Vol. 69, No. 135 / Thursday, July 15, 2004 / Proposed Rules

PRS’s sale of the QSB stock, replacement
QSB stock. Therefore, under paragraph (c)(1)
of this section, A may defer a portion of A’s
distributive share of the remaining gain from
the partnership’s sale of the QSB stock. A
must recognize that remaining gain, however,
to the extent that A’s share of the amount
realized by PRS on the sale of the QSB stock
(excluding the QSB stock that was replaced
by PRS) exceeds the cost of the replacement
QSB stock purchased by A during the 60-day
period following the sale of the QSB stock.
The amount realized by PRS on the sale of
the QSB stock (excluding the QSB stock that
was replaced by PRS) is $80 ($300 minus
$220). Under paragraph (c)(2) of this section,
A’s share of that amount realized is $40 (50/
100 (A’s share of the gain from the sale of the
QSB stock) multiplied by $80). Because the
replacement QSB stock purchased by A cost
$40, A defers recognition of all of the
remaining gain from the sale of the QSB
stock.
(iv) The adjusted basis of A’s interest in
PRS is not increased by the gain that was not
recognized pursuant to paragraph (b)(1) of
this section, $60, but is increased by the gain
that was not recognized pursuant to
paragraph (c)(1) of this section, $40. See
paragraphs (b)(3)(i) and (c)(3)(i) of this
section. PRS must decrease its basis in the
replacement QSB stock by the $60 of
partnership section 1045 gain that was
allocated to A. See paragraph (b)(3)(ii) of this
section. A must decrease A’s basis in the
replacement QSB stock purchased by A by
the $40 not recognized pursuant to paragraph
(c)(1) of this section. See paragraph (c)(3)(ii)
of this section.
Example 10. Change in partner’s interest in
partnership while partnership holds QSB
stock. (i) Assume the same facts as in
Example 9, except that, on August 2, 2006,
A sells a 25 percent interest in PRS to Z. On
July 10, 2007, A repurchases the 25 percent
interest from Z for $50. Assume that PRS
makes a timely election under section 754 for
the taxable year during which A purchases
Z’s PRS interest and that, under section
743(b), A has a positive basis adjustment of
$25.
(ii) PRS allocates the $200 of realized gain
from the sale of the QSB stock $100 to A and
$100 to X. However, A has a positive basis
adjustment of $25; therefore, A’s share of the
gain is reduced to $75. Because A is an
eligible partner under paragraph (a)(2) of this
section, A may defer recognition of A’s
distributive share of gain from the sale of the
QSB stock subject to the nonrecognition
limitation described in paragraph (a)(3) of
this section. The smallest interest that A held
in PRS during the time that PRS held the
QSB stock is 25 percent. Under the
nonrecognition limitation, A may not defer
more than 25 percent of the partnership gain
realized from the sale of the QSB stock
(determined without regard to any basis
adjustment under section 734(b) or section
743(b), other than a basis adjustment
described in paragraph (b)(3)(ii) of this
section). Because the partnership’s realized
gain determined without regard to A’s basis
adjustment under section 743(b) is $200, A
may defer recognition of $50 (25% of $200)
of the gain from the sale of the QSB stock.

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A must recognize the remaining $25 of that
gain.
Example 11. Sale by partner of QSB stock
received in a liquidating distribution. (i) On
January 1, 2006, A, an individual, and X, a
corporation, form PRS, a partnership. A and
X each contribute $150 to PRS and agree to
share all partnership items equally. PRS
purchases QSB stock on February 1, 2006, for
$300. On May 1, 2006, when the QSB stock
has appreciated in value to $400, A
contributes $100 to PRS, increasing A’s
interest in PRS’s income, gains, losses,
deductions, and credits to 60 percent. On
June 1, 2009, when the QSB stock is still
worth $400, PRS makes a liquidating
distribution of $300 worth of QSB stock to A.
Under section 732, A’s basis in the
distributed QSB stock is $250. A sells the
QSB stock on August 4, 2009, for $600,
realizing a gain of $350 (none of which is
treated as ordinary income). A purchases
replacement QSB stock on August 30, 2009,
for $550, and makes a valid election under
section 1045 with respect to the QSB stock.
(ii) A is an eligible partner under paragraph
(a)(2)(i) of this section. Therefore, under
paragraph (d)(1) of this section, A is treated
as having acquired the distributed QSB stock
in the same manner as PRS and as having
held the QSB stock since February 1, 2006,
its original issue date. Because A purchased,
within 60 days of A’s sale of the QSB stock,
replacement QSB stock, A is eligible to defer
a portion of A’s gain from the sale of the QSB
stock. A must recognize gain, however, to the
extent that A’s amount realized on the sale
of the QSB stock, $600, exceeds the cost of
the replacement QSB stock purchased by A
during the 60-day period beginning on the
date of the sale of the relinquished QSB
stock, $550. Accordingly, A must recognize
$50 of the gain from the sale of the QSB
stock. A defers recognition of the remaining
$300 of gain to the extent that such gain does
not exceed the distribution nonrecognition
limitation.
(iii) Under paragraph (d)(3)(ii) of this
section, A’s nonrecognition limitation with
respect to the sale of the QSB stock is A’s
section 1045 amount realized with respect to
the stock, reduced by A’s section 1045
adjusted basis with respect to the stock. A’s
amount realized from the sale is the product
of A’s amount realized from the sale, $600;
and a fraction:
(1) the numerator of which is A’s smallest
percentage interest in PRS’s income, gain, or
loss with respect to such stock, 50%; and
(2) the denominator of which is A’s
percentage interest in that type of partnership
QSB stock immediately after the distribution,
75% (the value of the stock distributed to A,
$300, divided by the value of all QSB stock
of that type acquired by PRS, $400).
Therefore, A’s section 1045 amount
realized is $400 ($600 multiplied by 50/75).
Because PRS distributed the QSB stock to A
in liquidation of A’s interest in PRS, A’s
section 1045 adjusted basis is the product of
PRS’s basis in all of the QSB stock of the type
distributed, $300; A’s smallest interest (prior
to the distribution) in PRS’s income, gain, or
loss with respect to QSB stock of the type
distributed, 50%; and the percentage of the
distributed QSB stock that was sold by A,

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100%. Therefore, A’s section 1045 adjusted
basis is $150 (the product of $300, 50%, and
100%)) and A’s nonrecognition limitation
amount on the sale of the QSB stock is $250
($400 section 1045 amount realized minus
$150 section 1045 adjusted basis).
Accordingly, A defers recognition of $250 of
the remaining $300 gain from the sale of the
QSB stock.
(iv) A’s basis in the replacement QSB stock
is $300 (cost of the replacement stock, $550,
reduced by the gain not recognized under
section 1045, $250).
Example 12. Sale by partner of QSB stock
received in a nonliquidating distribution. (i)
The facts are the same as in Example 11,
except that, on June 1, 2009, PRS distributes
only $200 of the QSB stock to A, reducing
A’s interest in PRS from 60% to 33%. PRS’s
basis in the distributed QSB stock is $150.
On November 1, 2009, A sells for $250 the
QSB stock distributed by PRS to A and
purchases, within 60 days of the date of sale
of the relinquished QSB stock, replacement
QSB stock for $250. On December 1, 2009,
PRS sells all of its QSB stock for $250 and
purchases, within 60 days of the date of the
sale of the relinquished QSB stock,
replacement QSB stock for $250. A makes a
timely election to apply section 1045 with
respect to its sale of the distributed QSB
stock and PRS makes a timely election to
apply section 1045 with respect to its sale of
the QSB stock.
(ii) Under section 732, A’s basis in the
distributed QSB stock is $150. Therefore, A
realizes a gain on the sale of the distributed
QSB stock of $100. Because A made a valid
election to apply section 1045 to the sale, and
because A purchased, within 60 days of A’s
sale of the QSB stock, replacement QSB stock
at a cost equal to the amount realized on the
sale of the distributed QSB stock, A defers
recognition of the gain from the sale of the
QSB stock to the extent that such gain does
not exceed the distribution nonrecognition
limitation.
(iii) Under paragraph (d)(3) of this section,
the nonrecognition limitation with respect to
A’s sale of the QSB stock is A’s section 1045
amount realized reduced by A’s section 1045
adjusted basis. Because PRS did not
distribute all of a particular type of QSB
stock and the distribution of the QSB stock
to A was not in liquidation of A’s interest in
PRS, A’s section 1045 amount realized is
$125 (A’s amount realized from the sale of
the distributed QSB stock, $250, multiplied
by A’s smallest percentage interest (prior to
the distribution) in PRS’s income, gain, or
loss with respect to such stock, 50%). A’s
section 1045 adjusted basis is the product of
the partnership’s basis in the QSB stock sold
by the partner, $150, and A’s smallest
percentage interest (prior to the distribution)
in the partnership’s income, gain, or loss
with respect to such stock, 50%. Therefore,
A’s section 1045 adjusted basis is $75 (50%
of $150), and A’s nonrecognition limitation
amount on the sale of the QSB stock is $50
($125 section 1045 amount realized minus
$75 section 1045 adjusted basis). As this
amount is less than the amount of gain that
A is eligible to defer under section 1045,
$100, A defers recognition of only $50 of the
gain from the sale of the QSB stock. A must
recognize the remaining $50 of that gain.

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(iv) The partnership realizes gain of $100
($250 amount realized minus $150 remaining
basis in QSB stock) on the sale of its QSB
stock. Because the partnership reinvested its
entire amount realized in new QSB stock and
because the partnership made a timely
election to apply section 1045, the
partnership may treat all of this gain as
section 1045 gain. A’s share of the
partnership section 1045 gain is $50 (50% of
$100). Because A is an eligible partner under
paragraph (a)(2) of this section, A can defer
recognition of this gain subject to the
nonrecognition limitation described in
paragraph (a)(3) of this section. The smallest
percentage interest that A held in PRS during
the time that PRS held the QSB stock
(determined without regard to the reduction
that occurred as a result of PRS’s distribution
of QSB stock to A) is 50%. See paragraph
(a)(3)(ii) of this section. Therefore, under the
nonrecognition limitation, A can defer
recognition of all $50 (50% of $100) of the
gain allocated to A.
Example 13. Contribution of replacement
QSB stock to a partnership. (i) On January 1,
2006, A, an individual, B, an individual, and
X, a corporation, form PRS, a partnership. A,
B, and X each contribute $25 to PRS and
agree to share all partnership items equally.
On February 1, 2006, PRS purchases Stock 1,
which is QSB stock in the hands of the
partnership. PRS sells Stock 1 on November
4, 2006, for $150. PRS realizes $75 of gain
from the sale of Stock 1 (none of which is
treated as ordinary income) and allocates $25
of gain to each of its partners. PRS informs
the partners that it does not intend to make
an election under section 1045 with respect
to the sale of Stock 1. Each partner’s share
of the amount realized from the sale of Stock
1 is $50. On November 30, 2006, A, an
eligible partner within the meaning of
paragraph (a)(2) of this section, purchases
Stock 2, which is also QSB stock, for $50 and
makes a valid section 1045 election under
paragraph (c)(1) of this section.
Subsequently, A transfers Stock 2 to ABC, a
partnership.
(ii) Because A purchased, within 60 days
of PRS’s sale of Stock 1, replacement QSB
stock for a cost equal to A’s share of the
partnership’s amount realized on the sale of
Stock 1, and because A made a valid election
to apply section 1045 with respect to A’s
share of the gain from PRS’s sale of Stock 1,
A does not recognize A’s $25 distributive
share of the gain from PRS’s sale of Stock 1.
Before the contribution of Stock 2 to ABC,
A’s adjusted basis in Stock 2 is $25 ($50 cost
minus $25 nonrecognition amount). Upon
the contribution of Stock 2 to ABC, A’s basis
in the ABC partnership interest is $25, and
ABC’s basis in Stock 2 is $25. However,
Stock 2 does not qualify as QSB stock in
ABC’s hands because it was not acquired at
original issue. Neither A nor ABC will be
eligible for section 1045 treatment on a
subsequent sale of Stock 2.

(h) Effective date. This section applies
to sales of QSB stock on or after the date

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final regulations are published in the
Federal Register.
Mark E. Matthews,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 04–15964 Filed 7–14–04; 8:45 am]
BILLING CODE 4830–01–P

DEPARTMENT OF LABOR
Occupational Safety and Health
Administration
29 CFR Part 1926
RIN 1218–AC14
[Docket No. S–775 A]

Steel Erection; Slip Resistance of
Skeletal Structural Steel
Occupational Safety and Health
Administration (OSHA), Labor.
ACTION: Notice of proposed rulemaking;
limited reopening of rulemaking record.
AGENCY:

SUMMARY: OSHA is reopening the
rulemaking record of Docket S–775,
Steel Erection, to obtain comments and
information on a provision that
addresses the slip resistance of walking
surfaces of coated structural steel
members, 29 CFR 1926.754(c)(3), and
Appendix B to that standard. This
provision is scheduled to take effect on
July 18, 2006. OSHA is considering
whether to retain, amend, or revoke this
provision, based on whether suitable
and appropriate test methods for testing
structural steel coatings, and whether
slip-resistant coatings meeting the slip
resistance criteria in the standard, can
reasonably be expected to be available
by the effective date. OSHA invites the
public to submit additional comments
and information relating to the
appropriateness of § 1926.754(c)(3).
DATES: Submit written hearing requests
and comments regarding this notice, by
the following dates:
Hard Copy: Your hearing requests and
comments must be submitted
[postmarked or sent] by October 13,
2004.
Facsimile and electronic
transmission: Your hearing requests and
comments must be sent by October 13,
2004.
Please see the section entitled
‘‘Supplementary Information’’ for
additional information on submitting
written comments and hearing requests.
ADDRESSES: You may submit comments
and hearing requests, identified by
Docket number (S–775 A) and RIN
number (1218–AC14), by any of the
following methods:

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Regular mail, express delivery, handdelivery, and messenger service: Submit
three copies of comments, attachments,
and hearing requests to the OSHA
Docket Office, Docket No. S–775 A,
Room N–2625, U.S. Department of
Labor, 200 Constitution Avenue, NW.,
Washington, DC 20210; telephone (202)
693–2350. OSHA Docket Office and
Department of Labor hours of operation
are 8:15 a.m. to 4:45 p.m., e.s.t.
Please note that there may be delays
in receiving comments and other
materials by regular mail. Telephone the
OSHA Docket Office at (202) 693–2350
for information regarding security
procedures concerning delivery of
materials by express delivery, hand
delivery, and messenger service.
Facsimile: Transmit hearing requests
and comments (including attachments)
consisting of 10 or fewer pages by
facsimile to the OSHA Docket Office at
(202) 693–1648.
Agency Web site: Submit comments
and hearing requests electronically
through OSHA’s Web site at http://
ecomments.osha.gov.
Federal eRulemaking Portal: Submit
comments and hearing requests
electronically at http://
www.regulations.gov. Follow the
instructions for submitting comments.
For detailed instructions on
submitting comments and hearing
requests, and for additional information
on the rulemaking process, see the
‘‘Public Participation’’ heading of the
SUPPLEMENTARY INFORMATION section of
this document.
All submissions will be available for
inspection and copying in the OSHA
Docket Office at the address above. Most
comments and submissions will be
posted on OSHA’s Web page (http://
www.osha.gov). Contact the OSHA
Docket Office for information about
materials not available on OSHA’s Web
page and for assistance in using the Web
page to locate docket submissions.
Because comments sent to the docket
are available for public inspection, the
Agency cautions interested parties
against including personal information
such as Social Security numbers and
birthdates with their submissions.
FOR FURTHER INFORMATION CONTACT: For
general information and press inquiries,
contact OSHA’s Office of Information
and Consumer Affairs, Room N–3647,
OSHA, U.S. Department of Labor, 200
Constitution Avenue, NW., Washington,
DC 20210; telephone (202) 693–1999.
For technical inquiries, contact Tressi
Cordaro, Office of Construction
Standards and Guidance, Directorate of
Construction, Room N–3468, OSHA,
U.S. Department of Labor, 200

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