Heterochat

Section 704(c) and § 1.704-1(b)(4)(i) govern the partners’ distributive shares of tax items.Section 1.704-1(b)(4)(i) provides that if partnership property is, under § 1.704-1(b)(2)(iv)(), properly reflected in the capital accounts of the partners and on the books of the partnership at a book value that differs from the adjusted tax basis of the property, then depreciation, depletion, amortization, and gain or loss, as computed for book purposes, with respect to the property will be greater or less than the depreciation, depletion, amortization, and gain or loss, as computed for federal tax purposes, with respect to the property.These tax items must be shared among the partners in a manner that takes account of the variation between the adjusted tax basis of the property and its book value in the same manner as variations between the adjusted tax basis and fair market value of property contributed to the partnership are taken into account in determining the partners’ shares of tax items under § 704(c).

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This ruling describes the application of sections 704(c)(1)(B) and 737 of the Code to assets-over partnership mergers.

The ruling holds that section 704(c)(1)(B) applies to newly created section 704(c) gain or loss in property contributed by the transferor partnership to the continuing partnership in an assets-over partnership merger, but does not apply to newly created reverse section 704(c) gain or loss resulting from a revaluation of property in the continuing partnership.

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Section 1.704-1(b)(2)(iv)() provides that a partnership may, upon the occurrence of certain events (including the contribution of money to the partnership by a new or existing partner), increase or decrease the partners’ capital accounts to reflect a revaluation of the partnership property.

Section 1.704-1(b)(2)(iv)() provides that, to the extent a partnership’s property is reflected on the books of the partnership at a book value that differs from the adjusted tax basis, the substantial economic effect requirements apply to the allocations of book items.

provide that the partners’ capital accounts will be determined and maintained in accordance with § 1.704-1(b)(2)(iv) of the Income Tax Regulations, distributions in liquidation of the partnership (or any partner’s interest) will be made in accordance with the partners’ positive capital account balances, and any partner with a deficit balance in the partner’s capital account following the liquidation of the partner’s interest must restore that deficit to the partnership (as set forth in § 1.704-1(b)(2)(ii)( Under § 704(b) and the regulations thereunder, allocations of a partnership’s items of income, gain, loss, deduction, or credit provided for in the partnership agreement will be respected if the allocations have substantial economic effect.

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