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prescribed in section 3717 of title 31 of
the United States Code and will accrue
from the date of the billing.
(d) ONDCP may assess search charges
where records are not located or where
records are exempt from disclosure.
(e) ONDCP may aggregate individual
requests and charge accordingly for
requests seeking portions of a document
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§ 1401.12 Fees to be charged—categories
of requesters.

(a) There are four categories of FOIA
requesters: commercial use requesters;
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(b) The specific levels of fees for each
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(1) Commercial use requesters.
ONDCP will recover the full direct cost
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requesters will not receive free searchtime or free reproduction of documents.
(2) Educational and non-commercial
scientific institution requesters. ONDCP
will charge the cost of reproduction,
excluding charges for the first 100
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auspices of a qualifying institution and
that the records are sought for scholarly
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(3) Requesters who are representatives
of the news media. ONDCP will charge
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charges for the first 100 pages.
Requesters must meet the criteria in
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function of the requester shall not be
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(4) All other requesters. ONDCP will
recover the full direct cost of the search
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Waiver or reduction of fees.

Fees chargeable in connection with a
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because it is likely to contribute
significantly to public understanding of
the operations or activities of the

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Government and is not primarily in the
commercial interest of the requester.
Barry McCaffrey,
Director.
[FR Doc. 99–32495 Filed 12–14–99; 8:45 am]
BILLING CODE 3180–02–U

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 8847]
RIN 1545–AS39

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 properties
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

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69903

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
Regulatory 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

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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
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) built-in 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

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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
sections 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 noncontributing 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

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current regulations under section 704(c),
a partnership may use the remedial
method 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
perjury, and require the transferee to
provide the amount of any liabilities
assumed or taken subject to by the
transferee, and any other information

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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
anti-churning 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
§ 1.743–1(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
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 § 1.613A–3(e)(6)(iv). After the
carryover basis has been recovered, any
further percentage depletion should

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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 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.

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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 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

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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 regulations 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.

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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. A
summary of the analysis is set forth
below under the heading ‘‘Summary of
Final Regulatory Flexibility Act
Analysis.’’ Pursuant to section 7805(f) of
the Internal Revenue Code, these final
regulations have been submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on their impact on small business.
Summary of 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

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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 specific 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

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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 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.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping
requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended 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. * * *

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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).
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

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69907

depreciation). If the required decrease
exceeds the amount of unrealized
depreciation in the distributed property,
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 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

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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 × $50), and $10 to Asset Y (100/500 ×
$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 distribution, 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

Cash .........................................................................................................................................................................
Inventory ..................................................................................................................................................................
Asset X ....................................................................................................................................................................
Asset Y ....................................................................................................................................................................

(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
(one-fourth 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
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 ($15,500 minus $4,000) is allocated
among the remaining property distributed to

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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, 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

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$1,500
3,500
2,000
4,000

$1,500
4,000
4,000
5,000

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.

*

*

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Fair market
value

*
*
(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

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Federal Register / Vol. 64, No. 240 / Wednesday, December 15, 1999 / Rules and Regulations
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 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
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

69909

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 § 1.704–
3(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:
Assets
Adjusted basis

Fair market
value

Cash .........................................................................................................................................................................
Accounts receivable .................................................................................................................................................
Inventory ..................................................................................................................................................................
Depreciable assets ..................................................................................................................................................

$5,000
10,000
20,000
20,000

$5,000
10,000
21,000
40,000

Total ..................................................................................................................................................................

55,000

76,000

Liabilities and Capital
Adjusted per
books

Fair market
value

Liabilities ..................................................................................................................................................................
Capital:
A .......................................................................................................................................................................
B .......................................................................................................................................................................
C .......................................................................................................................................................................

$10,000

$10,000

15,000
15,000
15,000

22,000
22,000
22,000

Total ...........................................................................................................................................................

55,000

76,000

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(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 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 contributes 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 (one-third 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).
(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

Asset
Asset
Asset
Asset
Asset

1
2
3
4
5

Fair market
value

.....................................................................................................................................................................
.....................................................................................................................................................................
.....................................................................................................................................................................
.....................................................................................................................................................................
.....................................................................................................................................................................

$10,000
4,000
6,000
7,000
3,000

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

Total ..................................................................................................................................................................

30,000

39,000

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69911

Capital
Adjusted per
books

Fair market
value

Partner A ..................................................................................................................................................................
Partner B ..................................................................................................................................................................
Partner C .................................................................................................................................................................

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

1
2
3
4
5

Fair market
value

Basis
adjustment

.......................................................................................................................................
.......................................................................................................................................
.......................................................................................................................................
.......................................................................................................................................
.......................................................................................................................................

$10,000
4,000
6,000
7,000
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

Capital
Adjusted per
books

Fair market
value

Special basis

Partner T ......................................................................................................................................
Partner B ......................................................................................................................................
Partner C .....................................................................................................................................

$10,000
10,000
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

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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
adjustment. 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

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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

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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 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 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

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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):
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

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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.

(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

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Federal Register / Vol. 64, No. 240 / Wednesday, December 15, 1999 / Rules and Regulations
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 § 1.704–
3(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

69913

an adjusted basis of $100,000 and a fair
market value of $500,000. B contributes
$500,000 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 elects to
use the remedial allocation method under
§ 1.704–3(d) with respect to the property. If
PRS had purchased the property at the time
of the partnership’s formation, the basis of
the property would have been recovered over
a 10-year period. The $400,000 of section
704(c) built-in gain will, therefore, be
amortized under § 1.704-3(d) over a 10-year
period beginning at the time of the
partnership’s formation.
(ii)(A) Except for the depreciation
deductions, PRS’s expenses equal its income
in each year 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
$120,000, while B’s is $440,000:

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 of the partnership interest to T, T’s
distributive share of the partnership’s
common basis depreciation deductions from
Asset 1 is $1,000. Also assume that, under
paragraph (j)(4)(i)(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 1 reported by T is
equal to $1,500.
Example 2. (i) A and B form equal
partnership PRS. A contributes property with

Capital accounts
A

B

Book

Tax

Book

Initial Contribution ............................................................................................
Depreciation Year 1 .........................................................................................
Remedial ..........................................................................................................

$500,000
(30,000)
........................

$100,000
........................
10,000

$500,000
(30,000)
........................

$500,000
(20,000)
(10,000)

Depreciation Year 2 .........................................................................................
Remedial ..........................................................................................................

470,000
(30,000)
........................

110,000
........................
10,000

470,000
(30,000)
........................

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

440,000

120,000

440,000

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) builtin 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

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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 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—

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Tax

(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 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

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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 receive $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

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depletion, any depletion allowance is
determined separately for each partner,
including the transferee partner, based
on the partner’s interest in such
property. See § 1.702–1(a)(8). For
partnerships that hold oil and gas
properties that are depleted at the
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

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properties 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 nondepletable 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 include
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

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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 paragraph (k)(2) of this
section, the partnership must attach a
statement to its return in the year that
the partnership is otherwise notified of

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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 or loss from section 751
property (including any remedial
allocations under § 1.704–3(d)) that
would have been allocated to the

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69915

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:

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Federal Register / Vol. 64, No. 240 / Wednesday, December 15, 1999 / Rules and Regulations
Assets
Adjusted basis

Fair market
value

Cash .........................................................................................................................................................................
Loans Receivable ....................................................................................................................................................
Capital Assets ..........................................................................................................................................................
Unrealized Receivables ...........................................................................................................................................

$3,000
10,000
7,000
0

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

Total ..................................................................................................................................................................

20,000

32,000

Liabilities and Capital
Adjusted per
books

Fair market
value

Liabilities ..................................................................................................................................................................
Capital:
A .......................................................................................................................................................................
B .......................................................................................................................................................................

$2,000

$2,000

9,000
9,000

15,000
15,000

Total ...........................................................................................................................................................

20,000

32,000

(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 halfinterest 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).
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.

*

*

*

*

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*

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(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 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),

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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 exchanges
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

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Federal Register / Vol. 64, No. 240 / Wednesday, December 15, 1999 / Rules and Regulations
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

69917

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

Capital Gain Property:
Asset 1 ..............................................................................................................................................................
Asset 2 ..............................................................................................................................................................
Ordinary Income Property:
Asset 3 ..............................................................................................................................................................
Asset 4 ..............................................................................................................................................................
Total ...........................................................................................................................................................

Fair market
value

$25,000
100,000

$75,000
117,500

40,000
10,000

45,000
2,500

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.
(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 ordinary 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:
Assets
Adjusted basis
Capital Gain Property:
Asset 1 ..............................................................................................................................................................
Asset 2 ..............................................................................................................................................................
Ordinary Income Property:
Asset 3 ..............................................................................................................................................................
Asset 4 ..............................................................................................................................................................
Total ...........................................................................................................................................................

(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

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($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).

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Fair market
value

$500
500

$750
500

500
500

250
500

2,000

2,000

(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—

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Federal Register / Vol. 64, No. 240 / Wednesday, December 15, 1999 / Rules and Regulations

(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
interest) 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).
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 ×
$75,000/192,500)). The amount of the basis
adjustment to Asset 2 is $2,646 ($8,750
minus $6,104 ($10,000 × $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
income in respect of a decedent, no part
of the basis adjustment under section
743(b) is allocated to these assets. See
§ 1.743–1(b).
(ii) The provisions of this paragraph
(b)(4) are illustrated by the following
example:
Example. (i) A and B are equal partners in
personal service partnership PRS. As a result
of B’s death, B’s partnership interest is
transferred to T when PRS’s balance sheet
(reflecting a cash receipts and disbursements
method of accounting) is as follows:
Assets
Adjusted basis

Fair market
value

Capital Asset ............................................................................................................................................................
Unrealized Receivables ...........................................................................................................................................

$2,000
0

$5,000
15,000

Total ..................................................................................................................................................................

2,000

20,000

Liabilities and Capital
Adjusted per
books

Fair market
value

Capital:
A .......................................................................................................................................................................
B .......................................................................................................................................................................

1,000
1,000

10,000
10,000

Total ...........................................................................................................................................................

2,000

20,000

(ii) None of the assets owned by PRS is
section 704(c) property, and the capital asset

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09:11 Dec 14, 1999

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is nondepreciable. The fair market value of
T’s partnership interest on the applicable

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date of valuation set forth in section 1014 is
$10,000. Of this amount, $2,500 is

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Federal Register / Vol. 64, No. 240 / Wednesday, December 15, 1999 / Rules and Regulations
attributable to T’s share of the partnership’s
capital asset, and $7,500 is attributable to T’s
50% share of the partnership’s unrealized
receivables. The partnership’s unrealized
receivables represent income in respect of a
decedent. Accordingly, under section
1014(c), T’s basis in its partnership interest
is not adjusted for that portion of the interest
which is attributable to the unrealized
receivables. Therefore, T’s basis in its
partnership interest is $2,500.
(iii) At the time of the transfer, B’s share
of the partnership’s basis in partnership
assets is $1,000. Accordingly, T receives a
$1,500 basis adjustment under section 743(b).
Under this paragraph (b)(4), the entire basis
adjustment is allocated to the partnership’s
capital asset.

(5) Transferred basis exchanges—(i)
In general. This paragraph (b)(5) applies
to basis adjustments under section
743(b) which result from exchanges 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. For example, this
paragraph applies if 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.
(ii) Allocations between classes of
property. If the total amount of the basis
adjustment under section 743(b) is zero,
then no adjustment to the basis of
partnership property will be made
under this paragraph (b)(5). If there is an
increase in basis to be allocated to
partnership assets, such increase must
be allocated to capital gain property or
ordinary income property, respectively,
only if 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
such property would result in a net gain
or net income, as the case may be, to the
transferee. Where, under the preceding
sentence, an increase in basis may be
allocated to both capital gain assets and
ordinary income assets, the increase
shall be allocated to each class in
proportion to the net gain or net income,
respectively, which would be allocated
to the transferee from the sale of all
assets in each class. If there is a decrease
in basis to be allocated to partnership
assets, such decrease must be allocated

to capital gain property or ordinary
income property, respectively, only if
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
such property would result in a net loss
to the transferee. Where, under the
preceding sentence, a decrease in basis
may be allocated to both capital gain
assets and ordinary income assets, the
decrease shall be allocated to each class
in proportion to the net loss which
would be allocated to the transferee
from the sale of all assets in each class.
(iii) Allocations within the classes—
(A) Increases. If there is an increase in
basis to be allocated within a class, the
increase must be allocated first to
properties with unrealized appreciation
in proportion to the transferee’s share of
the respective amounts of unrealized
appreciation before such increase (but
only to the extent of the transferee’s
share of each property’s unrealized
appreciation). Any remaining increase
must be allocated among the properties
within the class in proportion to the
transferee’s share of the amount that
would be realized by the partnership
upon the hypothetical sale of each asset
in the class.
(B) Decreases. If there is a decrease in
basis to be allocated within a class, the
decrease must be allocated first to
properties with unrealized depreciation
in proportion to the transferee’s shares
of the respective amounts of unrealized
depreciation before such decrease (but
only to the extent of the transferee’s
share of each property’s unrealized
depreciation). Any remaining decrease
must be allocated among the properties
within the class in proportion to the
transferee’s shares of their adjusted
bases (as adjusted under the preceding
sentence).
(C) Limitation in decrease of basis.
Where, as the result of a transaction to
which this paragraph (b)(5) applies, a
decrease in basis must be allocated to
capital gain assets, ordinary income
assets, or both, and the amount of the
decrease otherwise allocable to a
particular class exceeds the transferee’s
share of the adjusted basis to the
partnership of all depreciated assets in
that class, the transferee’s negative basis

69919

adjustment is limited to the transferee’s
share of the partnership’s adjusted basis
in all depreciated assets in that class.
(D) Carryover adjustment. Where a
transferee’s negative basis adjustment
under section 743(b) cannot be allocated
to any asset, because the adjustment
exceeds the transferee’s share of the
adjusted basis to the partnership of all
depreciated assets in a particular class,
the adjustment is made when the
partnership subsequently acquires
property of a like character to which an
adjustment can be made.
(iv) Examples. The provisions of this
paragraph (b)(5) are illustrated by the
following examples:
Example 1. A is a member of partnership
LTP, which has made an election under
section 754. The three partners in LTP have
equal interests in capital and profits. Solely
in exchange for a partnership interest in UTP,
A contributes its interest in LTP to UTP in
a transaction described in section 721. At the
time of the transfer, A’s basis in its
partnership interest ($5,000) equals its share
of inside basis (also $5,000). Under section
723, UTP’s basis in its interest in LTP is
$5,000. LTP’s only two assets on the date of
contribution are inventory with a basis of
$5,000 and a fair market value of $7,500, and
a nondepreciable capital asset with a basis of
$10,000 and a fair market value of $7,500.
The amount of the basis adjustment under
section 743(b) to partnership property is $0
($5,000, UTP’s basis in its interest in LTP,
minus $5,000, UTP’s share of LTP’s basis in
partnership assets). Because UTP acquired its
interest in LTP in a transferred basis
exchange, and the total amount of the basis
adjustment under section 743(b) is zero, UTP
receives no special basis adjustments under
section 743(b) with respect to the partnership
property of LTP.
Example 2. (i) A purchases a partnership
interest in LTP at a time when an election
under section 754 is not in effect. The three
partners in LTP have equal interests in
capital and profits. During a later year for
which LTP has an election under section 754
in effect, and in a transaction that is
unrelated to A’s purchase of the LTP interest,
A contributes its interest in LTP to UTP in
a transaction described in section 721 (solely
in exchange for a partnership interest in
UTP). At the time of the transfer, A’s adjusted
basis in its interest in LTP is $20,433. Under
section 721, A recognizes no gain or loss as
a result of the contribution of its partnership
interest to UTP. Under section 723, UTP’s
basis in its partnership interest in LTP is
$20,433. The balance sheet of LTP on the
date of the contribution shows the following:
Assets
Adjusted basis

Cash .........................................................................................................................................................................
Accounts receivable .................................................................................................................................................
Inventory ..................................................................................................................................................................

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$5,000
10,000
20,000

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Fair market
value
$5,000
10,000
21,000

69920

Federal Register / Vol. 64, No. 240 / Wednesday, December 15, 1999 / Rules and Regulations
Assets
Adjusted basis

Fair market
value

Nondepreciable capital asset ..................................................................................................................................

20,000

40,000

Total ..................................................................................................................................................................

55,000

76,000

Liabilities and Capital
Adjusted per
books

Fair market
value

Liabilities ..................................................................................................................................................................
Capital:
A .......................................................................................................................................................................
B .......................................................................................................................................................................
C .......................................................................................................................................................................

$10,000

$10,000

15,000
15,000
15,000

22,000
22,000
22,000

Total ...........................................................................................................................................................

55,000

76,000

(ii) The amount of the basis adjustment
under section 743(b) is the difference
between the basis of UTP’s interest in LTP
and UTP’s share of the adjusted basis to LTP
of partnership property. UTP’s interest in the
previously taxed capital of LTP is $15,000
($22,000, the amount of cash UTP would
receive if LTP liquidated immediately after
the hypothetical transaction, decreased by
$7,000, the amount of tax gain allocated to
UTP from the hypothetical transaction).
UTP’s share of the adjusted basis to LTP of
partnership property is $18,333 ($15,000
share of previously taxed capital, plus $3,333
share of LTP’s liabilities). The amount of the
basis adjustment under section 743(b) to
partnership property therefore, is $2,100
($20,433 minus $18,333).
(iii) The total amount of gain that would
be allocated to UTP from the hypothetical
sale of capital gain property is $6,666.67
(one-third of the excess of the fair market
value of LTP’s nondepreciable capital asset,
$40,000, over its basis, $20,000). The total
amount of gain that would be allocated to
UTP from the hypothetical sale of ordinary
income property is $333.33 (one-third of the
excess of the fair market value of LTP’s
inventory, $21,000, over its basis, $20,000).
Under paragraph (b)(5), LTP must allocate
$2,000 ($6,666.67 divided by $7,000 times
$2,100) of UTP’s basis adjustment to the
nondepreciable capital asset. LTP must
allocate $100 ($333.33 divided by $7,000
times $2,100) of UTP’s basis adjustment to
the inventory.

(c) Adjustments under section
734(b)—(1) Allocations between classes
of property—(i) General rule. Where
there is a distribution of partnership
property resulting in an adjustment to
the basis of undistributed partnership
property under section 734(b)(1)(B) or
(b)(2)(B), the adjustment must be
allocated to remaining partnership
property of a character similar to that of
the distributed property with respect to
which the adjustment arose. Thus, when
the partnership’s adjusted basis of
distributed capital gain property

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09:11 Dec 14, 1999

Jkt 190000

immediately prior to distribution
exceeds the basis of the property to the
distributee partner (as determined under
section 732), the basis of the
undistributed capital gain property
remaining in the partnership is
increased by an amount equal to the
excess. Conversely, when the basis to
the distributee partner (as determined
under section 732) of distributed capital
gain property exceeds the partnership’s
adjusted basis of such property
immediately prior to the distribution,
the basis of the undistributed capital
gain property remaining in the
partnership is decreased by an amount
equal to such excess. Similarly, where
there is a distribution of ordinary
income property, and the basis of the
property to the distributee partner (as
determined under section 732) is not the
same as the partnership’s adjusted basis
of the property immediately prior to
distribution, the adjustment is made
only to undistributed property of the
same class remaining in the partnership.
(ii) Special rule. Where there is a
distribution resulting in an adjustment
under section 734(b)(1)(A) or (b)(2)(A) to
the basis of undistributed partnership
property, the adjustment is allocated
only to capital gain property.
(2) Allocations within the classes—(i)
Increases. If there is an increase in basis
to be allocated within a class, the
increase must be allocated first to
properties with unrealized appreciation
in proportion to their respective
amounts of unrealized appreciation
before such increase (but only to the
extent of each property’s unrealized
appreciation). Any remaining increase
must be allocated among the properties
within the class in proportion to their
fair market values.
(ii) Decreases. If there is a decrease in
basis to be allocated within a class, the

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decrease must be allocated first to
properties with unrealized depreciation
in proportion to their respective
amounts of unrealized depreciation
before such decrease (but only to the
extent of each property’s unrealized
depreciation). Any remaining decrease
must be allocated among the properties
within the class in proportion to their
adjusted bases (as adjusted under the
preceding sentence).
(3) Limitation in decrease of basis.
Where a decrease in the basis of
partnership assets is required under
section 734(b)(2) and the amount of the
decrease exceeds the adjusted basis to
the partnership of property of the
required character, the basis of such
property is reduced to zero (but not
below zero).
(4) Carryover adjustment. Where, in
the case of a distribution, an increase or
a decrease in the basis of undistributed
property cannot be made because the
partnership owns no property of the
character required to be adjusted, or
because the basis of all the property of
a like character has been reduced to
zero, the adjustment is made when the
partnership subsequently acquires
property of a like character to which an
adjustment can be made.
(5) Example. The following example
illustrates this paragraph (c):
Example. (i) A, B, and C form equal
partnership PRS. A contributes $50,000 and
Asset 1, capital gain property with a fair
market value of $50,000 and an adjusted tax
basis of $25,000. B and C each contributes
$100,000. PRS uses the cash to purchase
Assets 2, 3, 4, 5, and 6. Assets 4, 5, and 6
are the only assets held by the partnership
which are subject to section 751. The
partnership has an election in effect under
section 754. After seven years, the adjusted
basis and fair market value of PRS’s assets are
as follows:

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Federal Register / Vol. 64, No. 240 / Wednesday, December 15, 1999 / Rules and Regulations

69921

Assets
Adjusted basis
Capital Gain Property:
Asset 1 ..............................................................................................................................................................
Asset 2 ..............................................................................................................................................................
Asset 3 ..............................................................................................................................................................
Ordinary Income Property:
Asset 4 ..............................................................................................................................................................
Asset 5 ..............................................................................................................................................................
Asset 6 ..............................................................................................................................................................
Total ..............................................................................................................................................................

(ii) Allocation between classes. Assume
that PRS distributes Assets 3 and 5 to A in
complete liquidation of A’s interest in the
partnership. A’s basis in the partnership
interest was $75,000. The partnership’s basis
in Assets 3 and 5 was $50,000 each. A’s
$75,000 basis in its partnership interest is
allocated between Assets 3 and 5 under
sections 732(b) and (c). A will, therefore,
have a basis of $25,000 in Asset 3 (capital
gain property), and a basis of $50,000 in
Asset 5 (section 751 property). The
distribution results in a $25,000 increase in
the basis of capital gain property. There is no
change in the basis of ordinary income
property.
(iii) Allocation within class. The amount of
the basis increase to capital gain property is
$25,000 and must be allocated among the
remaining capital gain assets in proportion to
the difference between the fair market value
and basis of each. The fair market value of
Asset 1 exceeds its basis by $50,000. The fair
market value of Asset 2 exceeds its basis by
$17,500. Therefore, the basis of Asset 1 will
be increased by $18,519 ($25,000, multiplied
by $50,000, divided by $67,500), and the
basis of Asset 2 will be increased by $6,481
($25,000 multiplied by $17,500, divided by
$67,500).

(d) Effective date. This section applies
to transfers of partnership interests and
distributions of property from a
partnership that occur on or after
December 15, 1999.
Par. 9. Section 1.1017–1 is amended
by:
1. Revising paragraph (g)(2)(iv).
2. Adding paragraph (g)(2)(v).
The addition and revision read as
follows:
§ 1.1017–1 Basis reductions following a
discharge of indebtedness.

*

*
*
*
*
(g) * * *
(2) * * *
(iv) Partner’s share of partnership
basis—(A) In general. For purposes of
this paragraph (g), a partner’s
proportionate share of the partnership’s
basis in depreciable property (or
depreciable real property) is equal to the
sum of—
(1) The partner’s section 743(b) basis
adjustments to items of partnership

VerDate 29-OCT-99

09:11 Dec 14, 1999

Jkt 190000

depreciable property (or depreciable
real property); and
(2) The common basis depreciation
deductions (but not including remedial
allocations of depreciation deductions
under § 1.704–3(d)) that, under the
terms of the partnership agreement
effective for the taxable year in which
the discharge of indebtedness occurs,
are reasonably expected to be allocated
to the partner over the property’s
remaining useful life. The assumptions
made by a partnership in determining
the reasonably expected allocation of
depreciation deductions must be
consistent for each partner. For
example, a partnership may not treat the
same depreciation deductions as being
reasonably expected by more than one
partner.
(B) Effective date. This paragraph
(g)(2)(iv) applies to elections made
under sections 108(b)(5) and 108(c) on
or after December 15, 1999.
(v) Treatment of basis reduction—(A)
Basis adjustment. The amount of the
reduction to the basis of depreciable
partnership property constitutes an
adjustment to the basis of partnership
property with respect to the partner
only. No adjustment is made to the
common basis of partnership property.
Thus, for purposes of income,
deduction, gain, loss, and distribution,
the partner will have a special basis for
those partnership properties the bases of
which are adjusted under section 1017
and this section.
(B) Recovery of adjustments to basis
of partnership property. Adjustments to
the basis of partnership property under
this section are recovered in the manner
described in § 1.743–1.
(C) Effect of basis reduction.
Adjustments to the basis of partnership
property under this section are treated
in the same manner and have the same
effect as an adjustment to the basis of
partnership property under section
743(b). The following example
illustrates this paragraph (g)(2)(v):
Example. (i) A, B, and C are equal partners
in partnership PRS, which owns (among

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Fair market
value

$ 25,000
100,000
50,000

$ 75,000
117,500
60,000

$ 40,000
50,000
10,000

$ 45,000
60,000
2,500

275,000

360,000

other things) Asset 1, an item of depreciable
property with a basis of $30,000. A’s basis in
its partnership interest is $20,000. Under the
terms of the partnership agreement, A’s share
of the depreciation deductions from Asset 1
over its remaining useful life will be $10,000.
Under section 1017, A requests, and PRS
agrees, to decrease the basis of Asset 1 with
respect to A by $10,000.
(ii) In the year following the reduction of
basis under section 1017, PRS amends its
partnership agreement to provide that items
of depreciation and loss from Asset 1 will be
allocated equally between B and C. In that
year, A’s distributive share of the
partnership’s common basis depreciation
deductions from Asset 1 is now $0. Under
§ 1.743–1(j)(4)(ii)(B), the amount of the
section 1017 basis adjustment that A recovers
during the year is $1,000. A will report
$1,000 of ordinary income because A’s
distributive share of the partnership’s
common basis depreciation deductions from
Asset 1 ($0) is insufficient to offset the
amount of the section 1017 basis adjustment
recovered by A during the year ($1,000).
(iii) In the following year, PRS sells Asset
1 for $15,000 and recognizes a $12,000 loss.
This loss is allocated equally between B and
C, and A’s share of the loss is $0. Upon the
sale of Asset 1, A recovers its entire
remaining section 1017 basis adjustment
($9,000). A will report $9,000 of ordinary
income.

(D) Effective date. This paragraph
(g)(2)(v) applies to elections made under
sections 108(b)(5) and 108(c) on or after
December 15, 1999.
PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 10. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.

Par. 11. In § 602.101, paragraph (b) is
amended by revising the entries for
1.732–1 and 1.743–1 in the table to read
as follows:
§ 602.101

*

OMB Control numbers.

*
*
(b) * * *

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*

*

PsN: 15DER1

69922

Federal Register / Vol. 64, No. 240 / Wednesday, December 15, 1999 / Rules and Regulations

Assets in Single-Employer Plans (29
CFR part 4044) prescribes actuarial
assumptions for valuing plan benefits of
terminating single-employer plans
covered by title IV of the Employee
*
*
*
*
*
1.732–1 .....................................
1545–0099 Retirement Income Security Act of 1974.
Among the actuarial assumptions
1545–1588
prescribed in part 4044 are interest
assumptions. These interest
*
*
*
*
*
1.743–1 .....................................
1545–0074 assumptions are intended to reflect
1545–1588 current conditions in the financial and
annuity markets.
*
*
*
*
*
Two sets of interest assumptions are
prescribed, one set for the valuation of
David A. Mader,
benefits to be paid as annuities and one
Acting Deputy Commissioner of Internal
set for the valuation of benefits to be
Revenue.
paid as lump sums. This amendment
Approved November 29, 1999.
adds to appendix B to part 4044 the
Jonathan Talisman,
annuity and lump sum interest
Acting Assistant Secretary of the Treasury.
assumptions for valuing benefits in
plans with valuation dates during
[FR Doc. 99–32400 Filed 12–14–99; 8:45 am]
January 2000.
BILLING CODE 4830–01–U
For annuity benefits, the interest
assumptions will be 6.90 percent for the
first 25 years following the valuation
PENSION BENEFIT GUARANTY
date and 6.25 percent thereafter. The
CORPORATION
annuity interest assumptions (in
comparison with those in effect during
29 CFR Part 4044
December 1999) reflect a 5-year increase
in the period during which the initial
Allocation of Assets in SingleEmployer Plans; Interest Assumptions rate applies (from a period of 20 years
following the valuation date to a period
for Valuing Benefits
of 25 years following the valuation
AGENCY: Pension Benefit Guaranty
date). The initial rate, in effect for the
Corporation.
first 25 years following the valuation
ACTION: Final rule.
date, represents an increase (from the
initial rate in effect for December 1999)
SUMMARY: The Pension Benefit Guaranty
of 0.40 percent. The ultimate rate, in
Corporation’s regulation on Allocation
effect thereafter, represents an increase
of Assets in Single-Employer Plans
(from the ultimate rate in effect for
prescribes interest assumptions for
December 1999) of 1.00 percent.
valuing benefits under terminating
For benefits to be paid as lump sums,
single-employer plans. This final rule
the interest assumptions to be used by
amends the regulation to adopt interest
the PBGC will be 5.00 percent for the
assumptions for plans with valuation
period during which a benefit is in pay
dates in January 2000. Interest
status, 4.25 percent during the sevenassumptions are also published on the
year period directly preceding the
PBGC’s web site (http://www.pbgc.gov).
benefit’s placement in pay status, and
EFFECTIVE DATE: January 1, 2000.
4.00 percent during any other years
FOR FURTHER INFORMATION CONTACT:
preceding the benefit’s placement in pay
Harold J. Ashner, Assistant General
status. The lump sum interest
Counsel, Office of the General Counsel,
assumptions represent a decrease (from
Pension Benefit Guaranty Corporation,
those in effect for December 1999), of
1200 K Street, NW., Washington, DC
0.25 percent for the period during
20005, 202–326–4024. (For TTY/TDD
which a benefit is in pay status and for
users, call the Federal relay service toll- the seven-year period directly preceding
free at 1–800–877–8339 and ask to be
the benefit’s placement in pay status;
connected to 202–326–4024.)
they are otherwise unchanged.
SUPPLEMENTARY INFORMATION: The
The PBGC has determined that notice
PBGC’s regulation on Allocation of
and public comment on this amendment
CFR part or section where
identified and described

Current
OMB control
No.

For valuation dates occurring in
the month—
*
*
January 2000 ................................

VerDate 29-OCT-99

09:11 Dec 14, 1999

are impracticable and contrary to the
public interest. This finding is based on
the need to determine and issue new
interest assumptions promptly so that
the assumptions can reflect, as
accurately as possible, current market
conditions.
Because of the need to provide
immediate guidance for the valuation of
benefits in plans with valuation dates
during January 2000, the PBGC finds
that good cause exists for making the
assumptions set forth in this
amendment effective less than 30 days
after publication.
The PBGC has determined that this
action is not a ‘‘significant regulatory
action’’ under the criteria set forth in
Executive Order 12866.
Because no general notice of proposed
rulemaking is required for this
amendment, the Regulatory Flexibility
Act of 1980 does not apply. See 5 U.S.C.
601(2).
List of Subjects in 29 CFR Part 4044
Pension insurance, Pensions.
In consideration of the foregoing, 29
CFR part 4044 is amended as follows:
PART 4044—ALLOCATION OF
ASSETS IN SINGLE-EMPLOYER
PLANS
1. The authority citation for part 4044
continues to read as follows:
Authority: 29 U.S.C. 1301(a), 1302(b)(3),
1341, 1344, 1362.

2. In appendix B, a new entry is
added to Table I, and Rate Set 75 is
added to Table II, as set forth below.
The introductory text of each table is
republished for the convenience of the
reader and remains unchanged.
Appendix B to Part 4044—Interest
Rates Used to Value Annuities and
Lump Sums
TABLE I.—Annuity Valuations:
[This table sets forth, for each indicated
calendar month, the interest rates (denoted
by i1, i2, . . ., and referred to generally as it)
assumed to be in effect between specified
anniversaries of a valuation date that occurs
within that calendar month; those
anniversaries are specified in the columns
adjacent to the rates. The last listed rate is
assumed to be in effect after the last listed
anniversary date.]

The values of it are:

it

for

t=

.0690

*
1–25

.0625

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it

for

>25

N/A

*

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*

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it
*

*

N/A

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