Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 79-92

1979-1 C.B. 180

Section 453
Section 703
Section 743
Section 754

IRS Headnote

Installment sale by partnership; gain; one partner's basis greater than share of amount realized. A partnership may elect to use the installment method for computing the gain on the sale of real property even though one partner, due to an optional adjustment to the basis of partnership property under section 743 of the Code, had a basis in the property greater than that partner's share of the amount realized on the sale. The entire loss will be recognized by the partner in the year sustained.

Full Text

Rev. Rul. 79-92

ISSUE

Can a partnership elect to use the installment method of accounting for gain allowed by section 453 of the Internal Revenue Code of 1954 when, because of an optional adjustment to the basis of partnership property under section 743, one partner's special basis in the property sold is greater than that partner's share of the amount realized by the partnership?

FACTS

ABC, a partnership, sold a parcel of real property and wishes to report the gain using the installment method of accounting allowed under section 453 of the Code. Partnership gains and losses are shared equally by the partners. A's and B's allocable shares of the amount realized were greater than their allocable shares of the common partnership basis in the real property as defined in section 1.743-1 of the Income Tax Regulations. However, because a section 754 election to adjust the basis of partnership property under section 743(b) was in effect when C purchased C's partnership interest, ABC increased its basis in the real property with respect to C. This increased basis was greater than C's share of the amount realized on the sale of the property.

LAW AND ANALYSIS

Under section 453(b) of the Code, a taxpayer may elect to report certain qualifying gains from the sale or other disposition of real property over the taxable periods during which the installment payments are received.

Losses may not be reported on the installment basis, but are allowed in the year in which the sale was made. Rev. Rul. 70-430, 1970-2 C.B. 51.

Under section 703(b) of the Code, any election affecting the computation of taxable income derived from a partnership shall, with certain exceptions not pertinent here, be made by the partnership. Under section 1.703-1(b)(1) of the regulations, elections of methods of accounting shall be made by the partnership and not by the partners separately.

Section 754 of the Code provides, in part, that if a partnership files an election, in accordance with regulations prescribed by the Secretary, the basis of partnership property shall be adjusted, in the case of a transfer of a partnership interest, in the manner provided in section 743.

Section 743(a) of the Code provides that the basis of partnership property shall not be adjusted as the result of a transfer of an interest in a partnership by sale or exchange or on the death of a partner unless the election provided by section 754 is in effect with respect to such partnership.

Section 743(b) of the Code provides, in part, that in the case of a transfer of an interest in a partnership by sale or exchange or upon the death of a partner, a partnership with respect to which the election provided in section 754 is in effect must increase the adjusted basis of the partnership property by the excess of the basis of the transferee partner's interest in the partnership over such partner's proportionate share of the adjusted basis of the partnership property or decrease the adjusted basis of the partnership property by the excess of the transferee partner's proportionate share of the adjusted basis of the partnership property over the basis of such partner's interest in the partnership. Under regulations prescribed by the Secretary, such increase or decrease is an adjustment to the basis of partnership property with respect to the transferee partner only.

Section 1.743-1(b)(1) of the regulations provides, in part, that for purposes of depreciation, depletion, gain or loss, and distributions the transferee partner will have a special basis for partnership properties that are adjusted under section 743(b) of the Code. This special basis is the transferee partner's share of the common partnership basis (the adjusted basis of such properties to the partnership without regard to any special basis adjustments of any transferee) plus or minus such partner's special basis adjustments.

HOLDING

Pursuant to section 703(b) of the Code and section 1.703-1(b)(1) of the regulations, the partnership may elect to use the installment method of accounting under section 453 for computing the gain on the sale of the real property by the partnership. If the partnership elects to use the installment method of accounting for gain, partners A and B will be allocated their distributive shares of the common gain recognized under the installment method. The partnership's election of the installment method, however, will not affect recognition of the loss attributable to C's interest: rather, the entire loss will be recognized by C for C's taxable year with or within which ends the partnership taxable year in which the sale occurred.