Application of sec. 704(c) to divisions.

Author:Schmalz, John
 
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Generally, if a partnership divides into two or more partnerships and the partnership either undergoes a formless division or takes a form other than an "assets-up" form, Treasury regulations treat the transaction as an "assets-over" form of division (Regs. Sec. 1.708-1(d)(3)(i)). Under the assets-over form, in which at least one of the resulting partnerships is a continuation of the original partnership, the original partnership is deemed to (1) contribute the assets and liabilities to one or more resulting partnerships in exchange for interests therein under Sec. 721 and (2) immediately distribute the interests in the resulting partnership to the original partnership's partners under Sec. 731 (Regs. Sec. 1.708-1(d)(3)(i)(a)).

Sec. 721(a) provides generally that neither the partnership nor the partners recognize gain or loss on a contribution of property to a partnership in exchange for a partnership interest. Sec. 722 provides that the basis of an interest in a partnership acquired by a contribution of money or other property to the partnership equals the amount of money and the adjusted basis of the property to the contributing partner at the time of the contribution, increased by the amount of any gain recognized under Sec. 721(b) to the contributing partner at that time.

Generally, in the case of a partnership's distribution to a partner, gain is not recognized except to the extent that any money distributed exceeds the adjusted tax basis of the partner's interest in the partnership immediately before the distribution (Sec. 731(a)). Sec. 732 provides the rules regarding the basis of distributed partnership property in the hands of a partner. Generally, under Sec. 732(a), the basis of property (other than money) a partnership distributes to a partner, other than in liquidation of the partner's interest, equals the partnership's adjusted basis in the property immediately before the distribution.

Accordingly, in an assets-over division, the resulting partnership generally will hold the property with the same basis as the original partnership following the deemed contribution. On the deemed distribution to the original partnership's partners, assuming that each partner receiving the deemed distribution has sufficient outside basis in its partnership interest, the distributee partners generally also will take a substituted basis in the distributed resulting partnership. Thus, there generally would be no inside/outside basis disparity in the...

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