IRS May Apply Anti-abuse Rule to Recent Transaction Set Up to Take Advantage of Partnership Basis Rules

On Date 1, Corporation A (wholly owned by B) transferred all of its assets to C in exchange for C stock. The assets transferred to C consisted of inventory, prepaid expenses, security deposits, trademarks, fixed assets, customer lists and goodwill. Ten days later, A sold its interest in C to D, a newly formed corporation, for cash and the assumption of liabilities. Under Sec. 732(b) and (c), D allocated basis equal to C's basis to the inventory, prepaid expenses and security deposits, and allocated the balance to other assets in proportion to C's basis in those assets. As a result, the basis in the trademarks was increased and the basis in fixed assets (depreciable over five to seven years) was increased.

Analysis

Under Regs. Sec. 1.701-2(b), when a partnership is formed or availed of in connection with a transaction a principal purpose of which is to reduce substantially the present value of the partners' aggregate Federal tax liability in a manner inconsistent with the intent of subchapter K, the IRS can recast the transaction for Federal tax purposes. In this situation, the partnership was formed and terminated for no other purpose than to take advantage of the rules under Sec. 732, so the application of the Regs. Sec. 1.701-2 anti-abuse rule is appropriate. Sec. 732 was enacted for taxpayer convenience for the distribution from a partnership with an operating history. It is clear that, under these facts, the creation and termination of the partnership in 10 days was a deliberate plan to use Sec. 732 inappropriately. Therefore, the Service will recast this transaction as a sale of A's assets to D and the subsequent creation of a partnership (C).

IRS Letter Ruling (CCA) 200128053 (4/22/01)