Final sec. 704(c) regulations issued.

• Author: Edquist, David

In late December 1994, the IRS issued final Regs. Sec. 1.704-3, which addresses aggregation of securities for securities partnerships as well as the remedial allocation method. These regulations adopt a more flexible approach to securities aggregation that will significantly benefit investment partnerships.

Regs. Sec. 1.704-3(e)(3)(iii) has broadened the definition of a "securities partnership" eligible to aggregate securities for Sec. 704(c) purposes. A securities partnership is now defined as a partnership that is either a "management company" or "investment partnership" that makes all of its book allocations in proportion to the partners' relative book capital accounts (except for reasonable special allocations for management or investment advisory services). A management company is defined as one registered under the Securities Act of 1940. An investment partnership is defined as a partnership, which, on the date of each capital account restatement, holds qualified financial assets constituting at least 90% of the fair market value of its noncash assets and that reasonably expects to revalue its qualified assets at least annually, as of the end of the first tax year in which the partnership adopts an aggregate See. 704(c) method.

Regs. Sec. 1.704-3(e)(3) permits securities partnerships to aggregate gains and losses from qualified financial assets, defined as any personal property (including stock) actively traded (as defined in Regs. Sec. 1.1092(d)-1), even if it is not readily tradeable on an established securities market (e.g., it is traded on a secondary market such as a commodities or interdealer market). In addition to items defined in Regs. Sec. 1.1092(d)-1, management companies may also aggregate gains and losses from stock, debt instruments, notional principal contracts, derivative financial instruments, options, forward or futures contracts, short positions and similar financial instruments, whether or not actively traded.

The final...