Final rules on distributions of partnership property.

• Author: Starr, Samuel P.

The IRS released final regulations under Secs. 704 (c) (1) (B) and 737, providing guidance on the treatment of distributions made by a partnership to a partner. These regulations apply to distributions made by a partnership to a partner on or after Jan. 9, 1995. Generally, the final regulations do not contain significant changes from the proposed regulations, but reflect some differences.

Sec. 704 (c) (1) (B)

The final regulations under Sec. 704 (c) (1) (B) relate to the recognition of gain or loss on certain distributions of contributed property by a partnership. Sec. 704 (c) (1) (B) states that, if any contributed property is distributed by the partnership (other than to the contributing partner) within five years of being contributed, the contributing partner shall recognize gain or loss from the sale of the property in an amount equal to the gain or loss allocated to the partner due to the variation between the basis of the property to the partnership and its fair market value (FMV).

Final Regs. Sec. 1.704-4 (a) (2) provides that Sec. 704 (c) (1) (B) applies only to the extent a transaction is a distribution under Sec. 731.

The language used in the proposed regulations, "same plan or arrangement," has been replaced with "distributions that are part of the same distribution." This change was made for simplification purposes only, and was not intended as a substantive change to the scope of a distribution for tax purposes.

Regs. Sec. 1.704-4 (c) (3) provides that for terminations under Sec. 708 (b) (1) (B), a new five-year period does not begin to the extent of any pretermination gain or loss that would have been allocated to a contributing partner under Sec. 704 (c) (1) (A) on a sale of contributed property immediately before the termination. However, a new five-year period does begin for any precontribution gain or loss in excess of the amount described above for property deemed contributed to the new partnership after the termination.

The final regulations clarified the following exceptions to Sec. 704 (c) (1) (B): On a distribution to a noncontributing partner in liquidation of the partnership, if the contributing partner receives an interest in property originally contributed by that partner, the amount of the built-in gain or loss that reattaches to the property must be equal to or greater than the built-in gain or loss that would have otherwise been allocated to the contributing partner if the contributed property had been sold...