Passthrough sales and exchanges.

• Author: Laffie, Lesli S.
• Position: Sales or exchanges of interests in partnerships, S corporations and trusts

Final regulations address sales or exchanges of interests in partnerships, S corporations and trusts (TD 8902, 9/21/00). The final rules interpret the Sec. l(h) lookthrough provisions, which were added by the Taxpayer Relief Act of 1997, Section 311 (a), and amended by the IRS Restructuring and Reform Act of 1998, Section 5001(a) (1). They explain the rules relating to the division of the holding period of a partnership interest. The final rules do not apply to any transaction treated as a redemption of a partnership interest for income tax purposes. The regulations were effective Sept. 21,2000.

Generally, capital gain attributable to the sale or exchange of an interest in a passthrough entity held for more than one year is taxed at 20%. However, the final rules provide that, when a taxpayer sells or exchanges an interest in a partnership, S corporation or trust that holds collectibles (as defined in Sec. 408(m)), rules similar to those in Sec. 751(a) apply to determine the capital gain attributable to certain unrealized gain in the collectibles.

Thus, a taxpayer should recognize, as collectibles gain, the net gain (but not net loss) that would be allocated to the taxpayer if the partnership, S corporation or trust transferred all of its collectibles for cash equal to the fair market value of the assets in a fully taxable transaction immediately before the transfer of the interest.

The final rules also provide that, when a partner sells an interest in a partnership, he must take into account the entire allocable share of Sec. 1250 capital gain in determining the unrecaptured Sec. 1250 gain, without regard to the Sec. 1 (h)(7)(B) limits.

As to lookthrough capital gain when a passthrough entity has a short-term holding period in collectibles, the final regulations provide...