Daily Tax Update - January 15, 2014: IRS Issues Proposed Regulations on Various Built-In Loss and Partnership Revaluation Issues

IRS Issues Proposed Regulations on Various Built-In Loss and Partnership Revaluation Issues:  The IRS has issued proposed regulations (REG-144468-05) that reflect statutory changes affecting partnerships, modify the basis allocation rules to prevent unintended consequences for substituted basis transactions, and provide additional guidance on allocations resulting from revaluations of partnership property. 

The proposed regulations provide guidance on section 704(c)(1)(C), which states that a partner’s built-in loss may only be taken into account in determining the contributing partner’s share of partnership items.  Specifically, the proposed regulations provide additional rules regarding:  (1) the scope of section 704(c)(1)(C); (2) the effect of the built-in loss; (3) distributions by partnerships holding section 704(c)(1)(C) property; (4) transfers of a section 704(c)(1)(C) partner’s partnership interest; (5) transfers of section 704(c)(1)(C) property; and (6) related reporting requirements.  Additionally, the proposed regulations offer guidance on other provisions of the American Jobs Creation Act of 2004 and conform the regulations to statutory changes in the Taxpayer Relief Act of 1997. 

Regarding the section 755 rules for allocation of basis, the proposed regulations generally restate the statutory provisions of section 755(c) and provide rules applicable to an allocation of a downward adjustment in the basis of partnership property under sections 734(b) and 755(a).  In addition, the proposed regulations address allocations between classes of property, allocations within classes of property, and successions to the transferor’s basis adjustment to prevent unintended consequences in substituted basis transactions.  The proposed regulations also provide that built-in gain and built-in loss do not take into account any decreases or increases to the property’s book value in connection with a revaluation of partnership property.  Lastly, the proposed regulations provide that a partnership may use any reasonable method to allocate items of income, gain, loss, and deduction associated with an item of property among the property’s forward and reverse section 704(c) layers subject to the anti-abuse rule in Treas. Reg. § 1.704-3(a)(10).

Comments and hearing requests are due by April 16. 

The proposed regulations can be accessed via: REG-144468-05.pdf