No Basis Reduction under Sec. 734 in Stock Held by Partnership in Corporate Partner

Generally, a partner and a partnership do not recognize gain or loss on a distribution of partnership property.

New Law

AJCA Section 834 provides that in applying the basis allocation rules to a distribution in liquidation of a partners interest, a partnership is precluded from decreasing the basis of a partners or related persons stock. Under the provision, any decrease in basis that otherwise would have been allocated to the stock is allocated to other partnership assets. If the decrease in basis exceeds the basis of the other partnership assets, the partnership recognizes gain in the amount of the excess.

Effective Date

This provision applies to distributions after Oct. 22, 2004.

Implications

The new law is intended to stop the avoidance of Sec. 732(f) by taxpayers stepping down the basis of stock under Sec. 734(b). Although patterned after Sec. 732(f), when testing the relationship of the partnerships stock to a partner, new Sec. 755(c) uses a more-than-50%-relationship test, as opposed to the Sec. 1504(a)(2) (80%) relationship test found in Sec. 732(f). Before the AJCA, this provision would have applied to distributions after Feb. 13, 2003. Now, certain transactions subject to this provision appear to be effectively grandfathered.

From Steven Schneider and Robert Crnkovich, Washington, DC