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In determining the amount of any IRC Section 743(b) adjustment, Treas. Section 1.752-1(f) "netting rule" apply when determining a transferee partner's share of partnership liabilities for purposes of an IRC Section 743(b) adjustment in connection with an assets-over partnership merger? The IRS rejected those arguments, concluding that IRC Section 761(e)(2), which provides that a distribution of a partnership interest is treated as an exchange of the interest for purposes of IRC Section 743, applies to the deemed distribution of a partnership interest in an assets-over merger for purposes of the optional and mandatory basis adjustment rules, resulting in a downward basis adjustment for Partner A. Partner A made various arguments that the deemed distribution to Partner A of the Partnership Y interest by Partnership X, pursuant to the Merger, did not constitute a "transfer" for purposes of the mandatory basis adjustment rules in IRC Sections 743(b) and (d). Does IRC Section 761(e) apply to a deemed distribution of a partnership interest in an assets-over merger?.Summary of issues, IRS analysis and conclusions
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The deferral under IRC Section 108(i)(6) of the IRC Section 752(b) deemed distribution presumably arose in whole or in part from Partner A's IRC Section 165(a) loss with respect to its interest in Partnership X. It appears that the deemed distribution of money to Partner A under IRC Section 752, as a result of a reduction in Partner A's share of Partnership X liabilities in connection with the COD event, was partially or entirely deferred under IRC Section 108(i)(6) (as discussed in further detail below), because, and to the extent, such deemed distribution would otherwise have caused Partner A to recognize gain under IRC Section 731(a)(1). At some point prior to the Merger, Partner A had taken an ordinary loss with respect to its interest in Partnership X under IRC Section 165(a) (presumably a worthlessness loss), reducing Partner A's basis in its interest in Partnership X. In 2009 or 2010, Partnership X had COD income that it had elected to defer under IRC Section 108(i), which Partnership X would be required to include in income ratably over a five-year period beginning in 2014. Immediately after the Merger, Partnership Y had a substantial built-in loss under IRC Section 743(d). Partnership Y had the greater net fair market value, so Partnership X was treated as transferring its assets and liabilities to Partnership Y in exchange for an interest in Partnership Y and then making a liquidating distribution of its Partnership Y interest to Partners A and Q. Both partnerships had the same majority partner (which appears to have been Partner A, although it is not entirely clear). Partnership X and Partnership Y engaged in a transaction treated as a partnership merger under Treas. Partners A and Q were partners in Partnership X. The facts in the memorandum are redacted, but certain aspects of the transactions are described in the analysis. Section 1.743-1(d)(1)(iii) for purposes of the calculation of a partner's previously taxed capital. The IRS concluded that deferred COD income should not be treated as "tax gain" under Treas. Section 1.752-1(f) with the calculation of a IRC Section 743(b) adjustment and the treatment of deferred cancellation of indebtedness (COD) income under IRC Section 108(i). Notably, the IRS considered the interaction of the netting rule of Treas.
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In partially redacted technical advice, the IRS advised on how to determine the amount of a mandatory IRC Section 743(b) adjustment in the context of an assets-over partnership merger. Deemed distribution of a partnership interest in an assets-over merger requires downward basis adjustment deferred COD income not considered tax gain that can attract IRC Section 743(b) adjustment