IRS may apply anti-abuse rule to recent transaction set up to take advantage of partnership basis rules.

• Position: Partners & Partnerships

On Date 1, Corporation A (wholly owned by B) transferred all of its assets to C in exchange for C stock. The assets transferred to C consisted of inventory, prepaid expenses, security deposits, trademarks, fixed assets, customer lists and goodwill. Ten days later, A sold its interest in C to D, a newly formed corporation, for cash and the assumption of liabilities. Under Sec. 732(b) and (c), D allocated basis equal to C's basis to the inventory, prepaid expenses and security deposits, and allocated the balance to other assets in proportion to C's basis in those assets. As a result, the basis in the trademarks was increased and the basis in fixed assets (depreciable over five to seven years) was increased.

Analysis

Under Regs. Sec. 1.701-2(b), when a partnership is formed or availed of in connection with a transaction a principal purpose of which is to reduce substantially the present value of the partners' aggregate Federal tax liability in a manner...