[Federal Register Volume 68, Number 110 (Monday, June 9, 2003)]
[Rules and Regulations]
[Pages 34293-34299]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-14204]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9059]
RIN 1545-AX18


Coordination of Sections 755 and 1060; Allocation of Basis 
Adjustments Among Partnership Assets and Application of the Residual 
Method to Certain Partnership Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document finalizes regulations relating to the allocation 
of basis adjustments among partnership assets under section 755. The 
regulations are necessary to implement section 1060, which applies the 
residual method to certain partnership transactions.

DATES: These regulations are effective June 9, 2003.

FOR FURTHER INFORMATION CONTACT: Craig Gerson, (202) 622-3050 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains amendments to 26 CFR part 1 under section 
755 of the Internal Revenue Code (Code). On April 5, 2000, a notice of 
proposed rulemaking (REG-107872-99, 2000-1 C.B. 911) under section 755 
was published in the Federal Register (65 FR 17829). Only one 
commentator submitted written comments in response to the notice of 
proposed rulemaking, and no public hearing was requested or held. After 
consideration of the comment, the proposed regulations are adopted as 
revised by this Treasury decision.

Explanation of Revisions and Summary of Contents

1. Summary

    Section 743(b) provides for an optional adjustment to the basis of 
partnership property following certain transfers of partnership 
interests. The amount of the basis adjustment is the difference between 
the transferee's basis in the partnership interest and the transferee's 
share of the partnership's basis in the partnership's assets. Once the 
amount of the basis adjustment is determined, it is allocated among the 
partnership's individual assets pursuant to section 755.

[[Page 34294]]

    On December 14, 1999, final regulations (TD 8847; 1999-2 C.B. 701) 
were published in the Federal Register under section 755 (64 FR 69903). 
Under these regulations, basis adjustments under section 743(b) are 
allocated among a partnership's assets as follows. First, the 
adjustment is allocated between the two classes of property described 
in section 755(b). These classes of property consist of capital assets 
and section 1231(b) property (capital gain property), and any other 
property of the partnership (ordinary income property). The amount of a 
basis adjustment under section 743(b) that is allocated to the class of 
ordinary income property is equal to the total amount of income, gain, 
or loss that would be allocated to the transferee from the sale of all 
ordinary income property. The amount of the basis adjustment under 
section 743(b) that is allocated to capital gain property is the total 
amount of the basis adjustment under section 743(b) less the amount of 
the basis adjustment allocated to ordinary income property. The basis 
adjustment is then allocated to individual assets within each class.
    The final regulations issued on December 14, 1999, worked in 
conjunction with Sec.  1.755-2T. In the case of a basis adjustment 
under section 743(b) or section 732(d), the fair market values of all 
assets other than goodwill or going concern value were determined on 
the basis of all the facts and circumstances, and the fair market value 
of goodwill and going concern value was determined using the residual 
method. As described more fully in the notice of proposed rulemaking, 
Sec.  1.755-2T was published prior to the enactment of section 1060(d), 
which (as amended in 1993) requires the residual method to be applied 
for purposes of determining the values of section 197 intangibles for 
purposes of applying section 755. These final regulations implement 
section 1060(d) and replace Sec.  1.755-2T.
    These final regulations differ from Sec.  1.755-2T by using the 
residual method to value all section 197 intangibles (not just goodwill 
and going concern value). In addition, these final regulations also 
apply to basis adjustments under section 734(b) and contain special 
rules for certain substituted basis transactions. Finally, for 
convenience, the provisions of the regulations have been relocated to 
the beginning of Sec.  1.755-1.
    Under these final regulations, a partnership is required to assign 
values to its assets as follows. First, the partnership must determine 
the values of each of its assets other than section 197 intangibles 
under all the facts and circumstances, taking into account section 
7701(g) (treating the fair market value of a property as not less than 
the amount of any nonrecourse indebtedness to which the property is 
subject). The partnership then must determine the gross value of all 
partnership assets (partnership gross value). Last, the partnership is 
required to use the residual method to assign values to the 
partnership's section 197 intangibles. For purposes of these 
regulations, the term section 197 intangibles includes all section 197 
intangibles (as defined in section 197), as well as any goodwill or 
going concern value that would not qualify as a section 197 intangible 
under section 197.
    If the aggregate value of partnership property other than section 
197 intangibles is equal to or greater than partnership gross value, 
then all section 197 intangibles are deemed to have a value of zero. In 
all other cases, the aggregate value of the partnership's section 197 
intangibles (the residual section 197 intangibles value) is deemed to 
equal the excess of partnership gross value over the aggregate value of 
partnership property other than section 197 intangibles. The residual 
section 197 intangibles value must be allocated, first, among section 
197 intangibles other than goodwill and going concern value. Any 
remaining value is assigned to goodwill and going concern value.
    The proposed regulations used the residual method to assign values 
to all partnership assets, rather than limiting the scope of the 
residual method to section 197 intangibles. Treasury and the IRS have 
concluded that these rules were unduly complex, especially when they 
applied to partnerships whose partnership agreements contained special 
allocations of partnership income or loss. Accordingly, the final 
regulations utilize the residual method only to value section 197 
intangibles.

2. Transactions Subject to the Regulations

    Because the proposed regulations used the residual method to value 
all partnership assets (and not just section 197 intangibles), it was 
desirable for all partnerships to value their assets using the same 
method. Accordingly, under the authority of sections 1060(d) and 755, 
the proposed regulations applied to all partnerships, whether or not 
their assets constituted a trade or business. In contrast, the final 
regulations apply the residual method only for the purpose of valuing 
section 197 intangibles, which are usually held by partnerships whose 
assets constitute a trade or business. Thus, the final regulations 
apply the residual method only to partnerships whose assets constitute 
a trade or business (as described in Sec.  1.1060-1(b)(2)).
    The proposed regulations specifically applied to basis adjustments 
under section 732(d). Some references to section 732(d) have been 
removed in the final regulations to enhance readability. Nevertheless, 
the final regulations continue to apply to basis adjustments under 
section 732(d).

3. Methods for Determining Partnership Gross Value

    If a partnership interest is transferred in a taxable transaction, 
the transferee's basis in its partnership interest provides a frame of 
reference for determining partnership gross value. In these 
transactions, both the proposed and the final regulations generally 
provide that partnership gross value is the amount that, if assigned to 
all partnership property, would result in a liquidating distribution to 
the transferee partner equal to that partner's basis (reduced by the 
amount, if any, of such basis that is attributable to partnership 
liabilities) in the transferred partnership interest immediately 
following the relevant transfer.
    In certain circumstances involving basis adjustments under section 
743(b), such as where income or loss with respect to particular section 
197 intangibles is allocated differently among partners, partnership 
gross value may vary depending on the fair market values of particular 
section 197 intangibles held by the partnership. In these situations, 
the final regulations require the partnership to use a reasonable 
method, consistent with the purposes of the final regulations, to 
determine partnership gross value.
    In the preamble to the proposed regulations, the IRS and the 
Treasury Department requested comments regarding how the residual 
method applies in the context of a basis adjustment that results from 
an exchange of a partnership interest in which the transferee's basis 
in the interest is determined in whole or in part by reference to the 
transferor's basis in the interest (a transferred basis exchange). 
Determining partnership gross value in such an exchange is problematic, 
because the transferee's basis in the partnership interest does not 
necessarily have any connection to the fair market values of 
partnership assets. No comments were received regarding the specific 
method to be adopted by the final regulations.
    The IRS and the Treasury Department also requested comments 
regarding how the residual method applies in the context of basis 
adjustments under section 734(b). One commentator

[[Page 34295]]

suggested that the final regulations should require one method for 
valuing partnership assets in the case of a pro rata distribution, and 
another method for valuing partnership assets in the case of a non-pro 
rata distribution. The IRS and the Treasury Department believe that 
this approach would be unnecessarily complex.
    The final regulations adopt a single method for determining 
partnership gross value that applies to all section 734(b) basis 
adjustments and to section 743(b) basis adjustments resulting from 
transferred basis exchanges. In these circumstances, partnership gross 
value is the value of the entire partnership as a going concern, 
increased by the amount of partnership liabilities. In the case of a 
basis adjustment under section 734(b), the value of the entire 
partnership as a going concern is determined immediately after the 
distribution causing the adjustment.
    A commentator has suggested that the same method for determining 
partnership gross value should apply to exchanged basis transactions, 
such as the distribution of a partnership interest by a partnership. 
The final regulations adopt this comment by replacing all references to 
transferred basis exchanges with references to substituted basis 
transactions. Conforming adjustments are also made to the special rules 
contained in Sec.  1.755-1(b)(5) for allocating basis adjustments under 
section 743(b) among a partnership's assets in these exchanges.

4. Transferors of Partnership Interests

    In the preamble to the proposed regulations, comments were 
requested as to whether the residual method should be used to determine 
the fair market values of partnership assets for purposes of applying 
section 1(h)(6)(B) (collectibles gain or loss), section 1(h)(7) 
(section 1250 capital gain), and section 751(a) (ordinary income) to 
the sale or other disposition of a partnership interest. No comments 
were received on this issue. Treasury and the IRS have determined that 
the potential benefits of a rule allowing transferors to use the 
residual method do not justify the increased complexity that the rule 
would have created.

5. Other Changes

    The final regulations add two clarifying rules for allocating basis 
adjustments under section 743(b) among a partnership's assets in the 
case of a transaction that is not a substituted basis transaction. The 
first rule provides that assets with respect to which the transferee 
partner has no interest in income, gain, losses, or deductions are not 
taken into account in allocating basis adjustments to capital assets. 
The second rule provides that in no event may the amount of any 
decrease in basis allocated to an item of capital gain property exceed 
the partnership's adjusted basis in that item. If the amount of a 
decrease in basis otherwise allocable to a particular capital asset 
exceeds the partnership's adjusted basis in that asset, the 
transferee's negative basis adjustment in that asset is limited to the 
partnership's adjusted basis in that asset, and the excess must be 
applied to reduce the remaining basis, if any, of other capital gain 
assets pro rata in proportion to the partnership's adjusted bases in 
such assets.

Effective Date

    These regulations apply to transfers of partnership interests and 
distributions of property from partnerships that occur on or after June 
9, 2003.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations, and because the 
regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, the 
notice of proposed rulemaking preceding these regulations was submitted 
to the Chief Counsel for Advocacy of the Small Business Administration 
for comment on its impact on small businesses.

Drafting Information

    The principal author of these regulations is Craig Gerson of the 
Office of the Associate Chief Counsel (Passthroughs and Special 
Industries). However, personnel from other offices of the IRS and the 
Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry to read in part as follows:

    Authority: 26 U.S.C. 7805. * * *

    Section 1.755-2 also issued under 26 U.S.C. 755 and 26 U.S.C. 1060. 
* * *

0
Par. 2. Section 1.755-1 is amended as follows:
0
1. Paragraph (a) is revised.
0
2.-3. A paragraph heading is added for paragraph (b)(1)(i).
0
4. The first two sentences of paragraph (b)(1)(i) are revised.
0
5. Paragraph (b)(3)(iii) is redesignated as paragraph (b)(3)(iv).
0
6. New paragraph (b)(3)(iii) is added.
0
7. In paragraph (b)(4)(ii), the Example is revised.
0
8. The paragraph heading for paragraph (b)(5) is revised.
0
9. Paragraph (b)(5)(i) is revised.
0
10. In paragraph (b)(5)(iv) Example 1, the last sentence is amended by 
removing the language ``transferred basis exchange'' and adding 
``substituted basis transaction'' in its place.
0
11. In paragraph (b)(5)(iv) Example 2, paragraph (iii), the third 
sentence is amended by adding the language ``this'' before the language 
``paragraph (b)(5)''.
0
12. In paragraph (c)(5) Example (i) introductory text is revised.
0
13. Paragraph (d) is revised.
0
14. Paragraph (e) is added.
0
The revisions and additions read as follows:


Sec.  1.755-1  Rules for allocation of basis.

    (a) In general--(1) Scope. This section provides rules for 
allocating basis adjustments under sections 743(b) and 734(b) among 
partnership property. If there is a basis adjustment to which this 
section applies, the basis adjustment is allocated among the 
partnership's assets as follows. First, the partnership must determine 
the value of each of its assets under paragraphs (a)(2) through (5) of 
this section. Second, the basis adjustment is allocated between the two 
classes of property described in section 755(b). These classes of 
property consist of capital assets and section 1231(b) property 
(capital gain property), and any other property of the partnership 
(ordinary income property). For purposes of this section, properties 
and potential gain treated as unrealized receivables under section 
751(c) and the regulations thereunder shall be treated as separate 
assets that are ordinary income property. Third, the portion of the 
basis adjustment allocated to each class is allocated among the items 
within the class. Basis adjustments under section 743(b) are allocated

[[Page 34296]]

among partnership assets under paragraph (b) of this section. Basis 
adjustments under section 734(b) are allocated among partnership assets 
under paragraph (c) of this section.
    (2) Coordination of sections 755 and 1060. If there is a basis 
adjustment to which this section applies, and the assets of the 
partnership constitute a trade or business (as described in Sec.  
1.1060-1(b)(2)), then the partnership is required to use the residual 
method to assign values to the partnership's section 197 intangibles. 
To do so, the partnership must, first, determine the value of 
partnership assets other than section 197 intangibles under paragraph 
(a)(3) of this section. The partnership then must determine partnership 
gross value under paragraph (a)(4) of this section. Last, the 
partnership must assign values to the partnership's section 197 
intangibles under paragraph (a)(5) of this section. For purposes of 
this section, the term section 197 intangibles includes all section 197 
intangibles (as defined in section 197), as well as any goodwill or 
going concern value that would not qualify as a section 197 intangible 
under section 197.
    (3) Values of properties other than section 197 intangibles. For 
purposes of this section, the fair market value of each item of 
partnership property other than section 197 intangibles shall be 
determined on the basis of all the facts and circumstances, taking into 
account section 7701(g).
    (4) Partnership gross value--(i) Basis adjustments under section 
743(b)--(A) In general. Except as provided in paragraph (a)(4)(ii) of 
this section, in the case of a basis adjustment under section 743(b), 
partnership gross value generally is equal to the amount that, if 
assigned to all partnership property, would result in a liquidating 
distribution to the partner equal to the transferee's basis in the 
transferred partnership interest immediately following the relevant 
transfer (reduced by the amount, if any, of such basis that is 
attributable to partnership liabilities).
    (B) Special situations. In certain circumstances, such as where 
income or loss with respect to particular section 197 intangibles are 
allocated differently among partners, partnership gross value may vary 
depending on the values of particular section 197 intangibles held by 
the partnership. In these special situations, the partnership must 
assign value, first, among section 197 intangibles (other than goodwill 
and going concern value) in a reasonable manner that is consistent with 
the ordering rule in paragraph (a)(5) of this section and would cause 
the appropriate liquidating distribution under paragraph (a)(4)(i)(A) 
of this section. If the actual fair market values, determined on the 
basis of all the facts and circumstances, of all section 197 
intangibles (other than goodwill and going concern value) is not 
sufficient to cause the appropriate liquidating distribution, then the 
fair market value of goodwill and going concern value shall be presumed 
to equal an amount that if assigned to goodwill and going concern value 
would cause the appropriate liquidating distribution.
    (C) Income in respect of a decedent. Solely for the purpose of 
determining partnership gross value under this paragraph (a)(4)(i), 
where a partnership interest is transferred as a result of the death of 
a partner, the transferee's basis in its partnership interest is 
determined without regard to section 1014(c), and is deemed to be 
adjusted for that portion of the interest, if any, that is attributable 
to items representing income in respect of a decedent under section 
691.
    (ii) Basis adjustments under section 743(b) resulting from 
substituted basis transactions. This paragraph (a)(4)(ii) applies to 
basis adjustments under section 743(b) that result from exchanges in 
which the transferee's basis in the partnership interest is determined 
in whole or in part by reference to the transferor's basis in the 
interest or to the basis of other property held at any time by the 
transferee (substituted basis transactions). In the case of a 
substituted basis transaction, partnership gross value equals the value 
of the entire partnership as a going concern, increased by the amount 
of partnership liabilities at the time of the exchange giving rise to 
the basis adjustment.
    (iii) Basis adjustments under section 734(b). In the case of a 
basis adjustment under section 734(b), partnership gross value equals 
the value of the entire partnership as a going concern immediately 
following the distribution causing the adjustment, increased by the 
amount of partnership liabilities immediately following the 
distribution.
    (5) Determining the values of section 197 intangibles--(i) Two 
classes. If the aggregate value of partnership property other than 
section 197 intangibles (as determined in paragraph (a)(3) of this 
section) is equal to or greater than partnership gross value (as 
determined in paragraph (a)(4) of this section), then all section 197 
intangibles are deemed to have a value of zero for purposes of this 
section. In all other cases, the aggregate value of the partnership's 
section 197 intangibles (the residual section 197 intangibles value) is 
deemed to equal the excess of partnership gross value over the 
aggregate value of partnership property other than section 197 
intangibles. The residual section 197 intangibles value must be 
allocated between two asset classes in the following order--
    (A) Among section 197 intangibles other than goodwill and going 
concern value; and
    (B) To goodwill and going concern value.
    (ii) Values assigned to section 197 intangibles other than goodwill 
and going concern value. The fair market value assigned to a section 
197 intangible (other than goodwill and going concern value) shall not 
exceed the actual fair market value (determined on the basis of all the 
facts and circumstances) of that asset on the date of the relevant 
transfer. If the residual section 197 intangibles value is less than 
the sum of the actual fair market values (determined on the basis of 
all the facts and circumstances) of all section 197 intangibles (other 
than goodwill and going concern value) held by the partnership, then 
the residual section 197 intangibles value must be allocated among the 
individual section 197 intangibles (other than goodwill and going 
concern value) as follows. The residual section 197 intangibles value 
is assigned first to any section 197 intangibles (other than goodwill 
and going concern value) having potential gain that would be treated as 
unrealized receivables under the flush language of section 751(c) 
(flush language receivables) to the extent of the basis of those 
section 197 intangibles and the amount of income arising from the flush 
language receivables that the partnership would recognize if the 
section 197 intangibles were sold for their actual fair market values 
(determined based on all the facts and circumstances) (collectively, 
the flush language receivables value). If the value assigned to section 
197 intangibles (other than goodwill and going concern value) is less 
than the flush language receivables value, then the assigned value is 
allocated among the properties giving rise to the flush language 
receivables in proportion to the flush language receivables value in 
those properties. Any remaining residual section 197 intangibles value 
is allocated among the remaining portions of the section 197 
intangibles (other than goodwill and going concern value) in proportion 
to the actual fair market values of such portions (determined based on 
all the facts and circumstances).
    (iii) Value assigned to goodwill and going concern value. The fair 
market value of goodwill and going concern value is the amount, if any, 
by which

[[Page 34297]]

the residual section 197 intangibles value exceeds the aggregate value 
of the partnership's section 197 intangibles (other than goodwill and 
going concern value).
    (6) Examples. The provisions of paragraphs (a)(2) through (5) are 
illustrated by the following examples, which assume that the 
partnerships have an election in effect under section 754 at the time 
of the transfer and that the assets of each partnership constitute a 
trade or business (as described in Sec.  1.1060-1(b)(2)). Except as 
provided, no partnership asset (other than inventory) is property 
described in section 751(a), and partnership liabilities are secured by 
all partnership assets. The examples are as follows:

    Example 1. (i) A is the sole general partner in PRS, a limited 
partnership having three equal partners. PRS has goodwill and going 
concern value, two section 197 intangibles other than goodwill and 
going concern value (Intangible 1 and Intangible 2), and two other 
assets with fair market values (determined using all the facts and 
circumstances) as follows: inventory worth $1,000,000 and a building 
(a capital asset) worth $2,000,000. The fair market value of each of 
Intangible 1 and Intangible 2 is $50,000. PRS has one liability of 
$1,000,000, for which A bears the entire risk of loss under section 
752 and the regulations thereunder. D purchases A's partnership 
interest for $650,000, resulting in a basis adjustment under section 
743(b). After the purchase, D bears the entire risk of loss for 
PRS's liability under section 752 and the regulations thereunder. 
Therefore, D's basis in its interest in PRS is $1,650,000.
    (ii) D's basis in the transferred partnership interest (reduced 
by the amount of such basis that is attributable to partnership 
liabilities) is $650,000 ($1,650,000--$1,000,000). Under paragraph 
(a)(4)(i) of this section, partnership gross value is $2,950,000 
(the amount that, if assigned to all partnership property, would 
result in a liquidating distribution to D equal to $650,000).
    (iii) Under paragraph (a)(3) of this section, the inventory has 
a fair market value of $1,000,000, and the building has a fair 
market value of $2,000,000. Thus, the aggregate value of partnership 
property other than section 197 intangibles, $3,000,000, is equal to 
or greater than partnership gross value, $2,950,000. Accordingly, 
under paragraphs (a)(3) and (5) of this section, the value assigned 
to each of the partnership's assets is as follows: inventory, 
$1,000,000; building, $2,000,000; Intangibles 1 and 2, $0; and 
goodwill and going concern value, $0. D's section 743(b) adjustment 
must be allocated under paragraph (b) of this section using these 
assigned fair market values.
    Example 2. (i) Assume the same facts as in Example 1, except 
that the fair market values of Intangible 1 and Intangible 2 are 
each $300,000, and that D purchases A's interest in PRS for 
$1,000,000. After the purchase, D's basis in its interest in PRS is 
$2,000,000.
    (ii) D's basis in the transferred partnership interest (reduced 
by the amount of such basis that is attributable to partnership 
liabilities) is $1,000,000 ($2,000,000--$1,000,000). Under paragraph 
(a)(4)(i) of this section, partnership gross value is $4,000,000 
(the amount that, if assigned to all partnership property, would 
result in a liquidating distribution to D equal to $1,000,000).
    (iii) Under paragraph (a)(5) of this section, the residual 
section 197 intangibles value is $1,000,000 (the excess of 
partnership gross value, $4,000,000, over the aggregate value of 
assets other than section 197 intangibles, $3,000,000 (the sum of 
the value of the inventory, $1,000,000, and the value of the 
building, $2,000,000)). The partnership must determine the values of 
section 197 assets by allocating the residual section 197 
intangibles value among the partnership's assets. The residual 
section 197 intangibles value is assigned first to section 197 
intangibles other than goodwill and going concern value, and then to 
goodwill and going concern value. Thus, $300,000 is assigned to each 
of Intangible 1 and Intangible 2, and $400,000 is assigned to 
goodwill and going concern value (the amount by which the residual 
section 197 intangibles value, $1,000,000, exceeds the fair market 
value of section 197 intangibles other than goodwill and going 
concern value, $600,000). D's section 743(b) adjustment must be 
allocated under paragraph (b) of this section using these assigned 
fair market values.
    Example 3. (i) Assume the same facts as in Example 1, except 
that the fair market values of Intangible 1 and Intangible 2 are 
each $300,000, and that D purchases A's interest in PRS for 
$750,000. After the purchase, D's basis in its interest in PRS is 
$1,750,000. Also assume that Intangible 1 was originally purchased 
for $300,000, and that its adjusted basis has been decreased to 
$50,000 as a result of amortization. Assume that, if PRS were to 
sell Intangible 1 for $300,000, it would recognize $250,000 of gain 
that would be treated as an unrealized receivable under the flush 
language in section 751(c).
    (ii) D's basis in the transferred partnership interest (reduced 
by the amount of such basis that is attributable to partnership 
liabilities) is $750,000 ($1,750,000--$1,000,000). Under paragraph 
(a)(4)(i) of this section, partnership gross value is $3,250,000 
(the amount that, if assigned to all partnership property, would 
result in a liquidating distribution to D equal to $750,000).
    (iii) Under paragraph (a)(5) of this section, the residual 
section 197 intangibles value is $250,000 (the amount by which 
partnership gross value, $3,250,000, exceeds the aggregate value of 
partnership property other than section 197 intangibles, 
$3,000,000). Intangible 1 has potential gain that would be treated 
as unrealized receivables under the flush language of section 
751(c). The flush language receivables value in Intangible 1 is 
$300,000 (the sum of PRS's basis in Intangible 1, $50,000, and the 
amount of ordinary income, $250,000, that the partnership would 
recognize if Intangible 1 were sold for its actual fair market 
value). Because the residual section 197 intangibles value, 
$250,000, is less than the flush language receivables value of 
Intangible 1, Intangible 1 is assigned a value of $250,000, and 
Intangible 2 and goodwill and going concern value are assigned a 
value of zero. D's section 743(b) adjustment must be allocated under 
paragraph (b) of this section using these assigned fair market 
values.
    Example 4. Assume the same facts as in Example 1, except that 
the fair market values of Intangible 1 and Intangible 2 are each 
$300,000, and that A does not sell its interest in PRS. Instead, A 
contributes its interest in PRS to E, a newly formed corporation 
wholly-owned by A, in a transaction described in section 351. Assume 
that the contribution results in a basis adjustment under section 
743(b) (other than zero). PRS determines that its value as a going 
concern immediately following the contribution is $3,000,000. Under 
paragraph (a)(4)(ii) of this section, partnership gross value is 
$4,000,000 (the value of PRS as a going concern, $3,000,000, 
increased by the partnership's liability, $1,000,000, immediately 
after the contribution). Under paragraph (a)(5) of this section, the 
residual section 197 intangibles value is $1,000,000 (the amount by 
which partnership gross value, $4,000,000, exceeds the aggregate 
value of partnership property other than section 197 intangibles, 
$3,000,000). Of the residual section 197 intangibles value, $300,000 
is assigned to each of Intangible 1 and Intangible 2, and $400,000 
is assigned to goodwill and going concern value (the amount by which 
the residual section 197 intangibles value, $1,000,000, exceeds the 
fair market value of section 197 intangibles other than goodwill and 
going concern value, $600,000). E's section 743(b) adjustment must 
be allocated under paragraph (b)(5) of this section using these 
assigned fair market values.
    Example 5. G is the sole general partner in PRS, a limited 
partnership having three equal partners (G, H, and I). PRS has 
goodwill and going concern value, two section 197 intangibles other 
than goodwill and going concern value (Intangible 1 and Intangible 
2), and two capital assets with fair market values (determined using 
all the facts and circumstances) as follows: Vacant land worth 
$1,000,000, and a building worth $2,000,000. The fair market value 
of each of Intangible 1 and Intangible 2 is $300,000. PRS has one 
liability of $1,000,000, for which G bears the entire risk of loss 
under section 752 and the regulations thereunder. PRS distributes 
the land to H in liquidation of H's interest in PRS. Immediately 
prior to the distribution, PRS's basis in the land is $800,000, and 
H's basis in its interest in PRS is $750,000. The distribution 
causes the partnership to increase the basis of its remaining 
property by $50,000 under section 734(b)(1)(B). PRS determines that 
its value as a going concern immediately following the distribution 
is $2,000,000. Under paragraph (a)(4)(iii) of this section, 
partnership gross value is $3,000,000 (the value of PRS as a going 
concern, $2,000,000, increased by the partnership's liability, 
$1,000,000, immediately after the distribution). Under paragraph 
(a)(5) of this section, the residual section 197 intangibles value 
of PRS's section 197 intangibles is $1,000,000 (the amount by which 
partnership gross value, $3,000,000, exceeds the aggregate value of 
partnership property other than section 197 intangibles, 
$2,000,000). Of the residual section 197 intangibles value,

[[Page 34298]]

$300,000 is assigned to each of Intangible 1 and Intangible 2, and 
$400,000 is assigned to goodwill and going concern value (the amount 
by which the residual section 197 intangibles value, $1,000,000, 
exceeds the fair market value of section 197 intangibles other than 
goodwill and going concern value, $600,000). PRS's section 734(b) 
adjustment must be allocated under paragraph (c) of this section 
using these assigned fair market values.

    (b) Adjustments under section 743(b)--(1) Generally--(i) 
Application. For basis adjustments under section 743(b) resulting from 
substituted basis transactions, paragraph (b)(5) of this section shall 
apply. For basis adjustments under section 743(b) resulting from all 
other transfers, paragraphs (b)(2) through (4) of this section shall 
apply. * * *
* * * * *
    (3) * * *
    (iii) Special rules--(A) Assets in which partner has no interest. 
An asset with respect to which the transferee partner has no interest 
in income, gain, losses, or deductions shall not be taken into account 
in applying paragraph (b)(3)(ii)(B) of this section.
    (B) Limitation in decrease of basis. In no event may the amount of 
any decrease in basis allocated to an item of capital gain property 
under paragraph (b)(3)(ii)(B) of this section exceed the partnership's 
adjusted basis in that item (or in the case of property subject to the 
remedial allocation method, the transferee's share of any remedial loss 
under Sec.  1.704-3(d) from the hypothetical transaction). In the event 
that a decrease in basis allocated under paragraph (b)(3)(ii)(B) of 
this section to an item of capital gain property would otherwise exceed 
the partnership's adjusted basis in that item, the excess must be 
applied to reduce the remaining basis, if any, of other capital gain 
assets pro rata in proportion to the bases of such assets (as adjusted 
under this paragraph (b)(3)).
* * * * *
    (4) * * *
    (ii) * * *

    Example. (i) A and B are equal partners in personal service 
partnership PRS. In 2004, as a result of B's death, B's partnership 
interest is transferred to T when PRS's balance sheet (reflecting a 
cash receipts and disbursements method of accounting) is as follows 
(based on all the facts and circumstances):

                                 Assets
------------------------------------------------------------------------
                                                                  Fair
                                                     Adjusted    market
                                                      basis      value
------------------------------------------------------------------------
Section 197 Intangible............................     $2,000     $5,000
Unrealized Receivables............................          0     15,000
                                                   ---------------------
        Total.....................................     $2,000    $20,000
---------------------------------------------------
                         Liabilities and Capital
------------------------------------------------------------------------
                                                     Adjusted     Fair
                                                    per books    market
                                                                 value
---------------------------------------------------
Capital:
    A.............................................      1,000     10,000
    B.............................................      1,000     10,000
                                                   ---------------------
        Total.....................................     $2,000    $20,000
------------------------------------------------------------------------

    (ii) None of the assets owned by PRS is section 704(c) property, 
and the section 197 intangible is not amortizable. The fair market 
value of T's partnership interest on the applicable date of 
valuation set forth in section 1014 is $10,000. Of this amount, 
$2,500 is attributable to T's 50% share of the partnership's section 
197 intangible, and $7,500 is attributable to T's 50% share of the 
partnership's unrealized receivables. The partnership's unrealized 
receivables represent income in respect of a decedent. Accordingly, 
under section 1014(c), T's basis in its partnership interest is not 
adjusted for that portion of the interest which is attributable to 
the unrealized receivables. Therefore, T's basis in its partnership 
interest is $2,500.
    (iii) Under paragraph (a)(4)(i)(C) of this section, solely for 
purposes of determining partnership gross value, T's basis in its 
partnership interest is deemed to be $10,000. Under paragraph 
(a)(4)(i) of this section, partnership gross value is $20,000 (the 
amount that, if assigned to all partnership property, would result 
in a liquidating distribution to T equal to $10,000).
    (iv) Under paragraph (a)(5) of this section, the residual 
section 197 intangibles value is $5,000 (the excess of partnership 
gross value, $20,000, over the aggregate value of assets other than 
section 197 intangibles, $15,000). The residual section 197 
intangibles value is assigned first to section 197 intangibles other 
than goodwill and going concern value, and then to goodwill and 
going concern value. Thus, $5,000 is assigned to the section 197 
intangible, and $0 is assigned to goodwill and going concern value. 
T's section 743(b) adjustment must be allocated using these assigned 
fair market values.
    (v) At the time of the transfer, B's share of the partnership's 
basis in partnership assets is $1,000. Accordingly, T receives a 
$1,500 basis adjustment under section 743(b). Under this paragraph 
(b)(4), the entire basis adjustment is allocated to the 
partnership's section 197 intangible.

    (5) Substituted basis transactions--(i) In general. This paragraph 
(b)(5) applies to basis adjustments under section 743(b) that result 
from exchanges in which the transferee's basis in the partnership 
interest is determined in whole or in part by reference to the 
transferor's basis in that interest. For exchanges on or after June 9, 
2003, this paragraph (b)(5) also applies to basis adjustments under 
section 743(b) that result from exchanges in which the transferee's 
basis in the partnership interest is determined by reference to other 
property held at any time by the transferee. For example, this 
paragraph (b)(5) applies if a partnership interest is contributed to a 
corporation in a transaction to which section 351 applies, if a 
partnership interest is contributed to a partnership in a transaction 
to which section 721(a) applies, or if a partnership interest is 
distributed by a partnership in a transaction to which section 731(a) 
applies.
* * * * *
    (c) * * *
    (5) * * *

[[Page 34299]]

    Example. (i) A, B, and C form equal partnership PRS. A 
contributes $50,000 and Asset 1, nondepreciable capital gain 
property with a fair market value of $50,000 and an adjusted tax 
basis of $25,000. B and C each contributes $100,000. PRS uses the 
cash to purchase Assets 2, 3, 4, 5, and 6. Assets 2 and 3 are 
nondepreciable capital assets, and Assets 4, 5, and 6 are inventory 
that has not appreciated substantially in value within the meaning 
of section 751(b)(3). Assets 4, 5, and 6 are the only assets held by 
the partnership that are subject to section 751. The partnership has 
an election in effect under section 754. After seven years, the 
adjusted basis and fair market value of PRS's assets are as follows:
* * * * *
    (d) Required statements. See Sec.  1.743-1(k)(2) for provisions 
requiring the transferee of a partnership interest to provide 
information to the partnership relating to the transfer of an interest 
in the partnership. See Sec.  1.743-1(k)(1) for a provision requiring 
the partnership to attach a statement to the partnership return showing 
the computation of a basis adjustment under section 743(b) and the 
partnership properties to which the adjustment is allocated under 
section 755. See Sec.  1.732-1(d)(3) for a provision requiring a 
transferee partner to attach a statement to its return showing the 
computation of a basis adjustment under section 732(d) and the 
partnership properties to which the adjustment is allocated under 
section 755. See Sec.  1.732-1(d)(5) for a provision requiring the 
partnership to provide information to a transferee partner reporting a 
basis adjustment under section 732(d).
    (e) Effective Date--(1) Generally. Except as provided in paragraphs 
(b)(5) and (e)(2) of this section, this section applies to transfers of 
partnership interests and distributions of property from a partnership 
that occur on or after December 15, 1999.
    (2) Special rules. Paragraphs (a) and (b)(3)(iii) of this section 
apply to transfers of partnership interests and distributions of 
property from a partnership that occur on or after June 9, 2003.


Sec.  1.755-2T  [Removed]

0
Par. 3. Section 1.755-2T is removed.


0
Par. 4. In Sec.  1.1060-1, paragraph (e)(2) is revised to read as 
follows:


Sec.  1.1060-1  Special allocation rules for certain asset 
acquisitions.

* * * * *
    (e) * * *
    (2) Transfers of interests in partnerships. For reporting 
requirements relating to the transfer of a partnership interest, see 
Sec.  1.755-1(d).

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 5. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


Sec.  602.101  [Amended]

0
Par. 6. In Sec.  602.101, paragraph (b), the entry for ``1.755-2T'' is 
removed.

David A. Mader,
Assistant Deputy Commissioner of Internal Revenue.

    Approved: May 22, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
[FR Doc. 03-14204 Filed 6-6-03; 8:45 am]
BILLING CODE 4830-01-P