REVENUE RULE 93-13

1993-1 C.B. 126, 1993-7 I.R.B. 12.

Internal Revenue Service
Revenue Ruling

TIMING OF § 734(B) BASIS ADJUSTMENTS; § 736(B)(1) PAYMENTS

Published: February 16, 1993

§ 734.--Optional Adjustment to Basis of Undistributed Partnership Property, 26 CFR 1.734-1: Optional adjustment to basis of undistributed partnership property.

(See Also § 736; 1.736-1.)

Timing of § 734(b) basis adjustments; § 736(b)(1) payments. § 734(b) basis adjustments to partnership property, made in connection with § 736(b)(1) payments to a partner, correspond in timing and amount with the recognition of gain or loss by the retiring partner with respect to those payments.

ISSUE

If a partnership that has in effect an election to adjust basis under § 754 of the Internal Revenue Code completely liquidates the interest of a partner by agreeing to make a series of cash payments that are treated as distributions under § 736(b)(1), when is the basis of partnership property adjusted under § 734(b)?

FACTS

A owns a one-third interest in partnership PRS. PRS has a § 754 election in effect. A retires from the partnership. PRS continues without dissolution and agrees to liquidate A's one-third interest in the partnership property by making a series of cash payments to A that are treated as distributions under § 736(b)(1). The total amount of payments A will receive is fixed and exceeds the adjusted basis of A's interest in PRS.

LAW AND ANALYSIS

§ 731(a)(1) of the Code provides that, in the case of distribution by a partnership to a partner, gain is not recognized to the partner except to the extent that any money distributed exceeds the adjusted basis of the partner's interest in the partnership immediately before the distribution.

§ 731(a)(2) of the Code provides that, in the case of a distribution by a partnership in liquidation of a partner's interest in a partnership where no property other than money, unrealized receivables (as defined in § 751(c)), and inventory (as defined in § 751(d)(2)) is distributed to the partner, loss is recognized to the extent of the excess of the adjusted basis of the partner's interest in the partnership over the sum of: (A) any money distributed, and (B) the basis to the distributee, as determined under § 732, of any unrealized receivables (as defined in § 751(c)) and inventory (as defined in § 751(d)(2)).

§ 736(b)(1) of the Code provides that payments made in liquidation of the interest of a retiring partner or a deceased partner are, to the extent the payments are determined to be made in exchange for the interest of that partner in partnership property, considered as a distribution by the partnership.

§ 1.736-1(b)(6) of the Income Tax Regulations provides that, except to the extent § 751(b) of the Code applies, the amount of any gain or loss with respect to payments under § 736(b)(1) for a retiring or deceased partner's interest in property for each year of payment is determined under § 731. However, where the total of the § 736(b)(1) payments to be made is a fixed sum, a retiring partner or a deceased partner's successor in interest may elect (in the partner's tax return for the first taxable year for which the partner receives § 736(b)(1) payments) to report and to measure the amount of any gain or loss by the difference between: (i) the amount treated as a distribution under § 736(b)(1) in that year, and (ii) the portion of the adjusted basis of the partner for the partnership interest attributable to the distribution (i.e., the amount that bears the same proportion to the partner's total adjusted basis for the partnership interest as the amount distributed under § 736(b)(1) in that year bears to the total amount to be distributed under § 736(b)(1)).

§ 734(b) of the Code provides that, in the case of a distribution of property to a partner, a partnership with respect to which the election provided in § 754 is in effect must increase the adjusted basis of partnership property under § 734(b)(1)(A) by the amount of any gain recognized to the distributee partner with respect to the distribution under § 731(a)(1), or in the case of a loss, decrease the adjusted basis of partnership property under § 734(b)(2)(A) by the amount of any loss recognized to the distributee partner with respect to the distribution under § 731(a)(2).

The adjustment to the basis of partnership property allowed under § 734(b) of the Code should correspond in both timing and amount with the recognition of gain or loss by a retiring partner (or a deceased partner's successor in interest) with respect to payments that are treated as distributions under § 736(b)(1). Accordingly, PRS must make § 734(b) basis adjustments, to the extent of A's recognized gain, in each partnership taxable year during which A recognizes gain with respect to the payments that are treated as distributions under § 736(b)(1). If A makes the election permitted by § 1.736-1(b)(6) of the regulations, the basis adjustments made by PRS correspond with the gain recognized by A pursuant to that election. If A does not make the election, the basis adjustments made by PRS correspond with the gain recognized by A under § 731.

HOLDING

If a partnership that has in effect an election to adjust basis under § 754 of the Internal Revenue Code completely liquidates the interest of a partner by agreeing to make a series of cash payments that are treated as distributions under § 736(b)(1), the § 734(b) basis adjustments to partnership property correspond in timing and amount with the recognition of gain or loss by the retiring partner with respect to those payments.

DRAFTING INFORMATION

The principal author of this revenue ruling is Christopher G. Kehoe of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Christopher G. Kehoe on (202) 622-3080 (not a toll-free call).

Rev. Rul. 93-13, 1993-1 C.B. 126, 1993-7 I.R.B. 12.