This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

65151 

Vol. 79, No. 212 

Monday, November 3, 2014 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–151416–06] 

RIN 1545–BG21 

Certain Distributions Treated as Sales 

or Exchanges 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document contains 

proposed regulations that prescribe how 

a partner should measure its interest in 

a partnership’s unrealized receivables 

and inventory items, and that provide 

guidance regarding the tax 

consequences of a distribution that 

causes a reduction in that interest. The 

proposed regulations take into account 

statutory changes that have occurred 

subsequent to the issuance of the 

existing regulations. The proposed 

regulations affect partners in 

partnerships that own unrealized 

receivables and inventory items and that 

make a distribution to one or more 

partners. 

DATES: Comments and requests for a 

public hearing must be received by 

February 2, 2015. 

ADDRESSES: Send submissions to 

CC:PA:LPD:PR (REG–151416–06), Room 

5203, Internal Revenue Service, P.O. 

Box 7604, Ben Franklin Station, 

Washington, DC, 20044. Submissions 

may be hand-delivered Monday through 

Friday between the hours of 8 a.m. and 

4 p.m. to CC:PA:LPD:PR (REG–151416– 

06), Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue NW., 

Washington, DC 20224, or via the 

Federal eRulemaking Portal at 

www.regulations.gov (IRS REG–151416– 

06). 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations, 

Allison R. Carmody at (202) 317–5279 

or Frank J. Fisher at (202) 317–6850; 

concerning submissions of comments 

and requests for hearing, 

Oluwafunmilayo Taylor at (202) 317– 

6901 (not toll-free numbers). 

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

The collection of information 

contained in this notice of proposed 

rulemaking has been submitted to the 

Office of Management and Budget for 

review in accordance with the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3507(d)). Comments on the 

collection of information should be sent 

to the Office of Management and 

Budget, Attn: Desk Officer for the 

Department of the Treasury, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, with copies to 

the Internal Revenue Service, Attn: IRS 

Reports Clearance Officer, 

SE–:CAR:MP:T:T:SP, Washington, DC 

20224. Comments on the collection of 

information should be received by 

January 2, 2015. 

Comments are specifically requested 

concerning: 

Whether the proposed collection of 

information is necessary for the proper 

performance of the Internal Revenue 

Service, including whether the 

information will have practical utility; 

The accuracy of the estimated burden 

associated with the proposed collection 

of information; 

How the quality, utility, and clarity of 

the information to be collected may be 

enhanced; 

How the burden of complying with 

the proposed collection of information 

may be minimized, including through 

the application of automated collection 

techniques or other forms of information 

technology; and 

Estimates of capital or start-up costs 

and costs of operation, maintenance, 

and purchase of service to provide 

information. 

The collection of information required 

by this proposed regulation is in 

§ 1.751–1(b)(3) and (b)(6), and in 

§ 1.755–1(c)(2)(vi). This information is 

required for a partnership and certain 

partners to report the information to the 

IRS necessary to ensure that the partners 

of the partnership properly report in 

accordance with the rules of the 

proposed regulations the correct amount 

of ordinary income and/or capital gain 

upon a distribution of property from the 

partnership to its partners. The 

collection of information is necessary to 

ensure tax compliance. 

The likely respondents are business or 

other for-profit institutions. 

Estimated total annual reporting 

burden: 22,500 hours. 

Estimated average annual burden 

hours per respondent vary from 30 

minutes to 2 hours, depending on 

individual circumstances, with an 

estimated average of 1 hour. 

Estimated number of respondents: 

22,500. 

Estimated annual frequency of 

responses: Annually. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number assigned by the Office of 

Management and Budget. 

Books or records relating to a 

collection of information must be 

retained as long as their contents may 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax return information 

are confidential, as required by section 

6103. 

Background 

This document contains proposed 

amendments to the Income Tax 

Regulations (26 CFR part 1) under 

section 751(b) of the Internal Revenue 

Code (the Code). In 1954, Congress 

enacted section 751 to prevent the use 

of a partnership to convert potential 

ordinary income into capital gain. See 

H.R. Rep. No. 1337 at 70 (1954), 

reprinted in 1954 U.S.C.C.A.N. 4017, 

4097. To that end, section 751(a) 

provides that the amount of any money, 

or the fair market value of any property, 

received by a transferor partner in 

exchange for all or part of that partner’s 

interest in the partnership’s unrealized 

receivables and inventory items is 

considered as an amount realized from 

the sale or exchange of property other 

than a capital asset. Further, section 

751(b) overrides the nonrecognition 

provisions of section 731 to the extent 

a partner receives a distribution from 

the partnership that causes a shift 

between the partner’s interest in the 

partnership’s unrealized receivables or 

substantially appreciated inventory 

items (collectively, the partnership’s 

‘‘section 751 property’’) and the 

partner’s interest in the partnership’s 

other property. 


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Whether section 751(b) applies 

depends on the partner’s interest in the 

partnership’s section 751 property 

before and after a distribution. The 

statute does not define a partner’s 

interest in a partnership’s section 751 

property, but the legislative history 

indicates that Congress believed a 

partner’s interest in a partnership’s 

section 751 property equals the 

partner’s rights to income from the 

partnership’s section 751 property: 

The provisions relating to unrealized 

receivables and appreciated inventory items 

are necessary to prevent the use of the 

partnership as a device for obtaining capitalgain treatment on fees or other rights to 

income and on appreciated inventory. 

Amounts attributable to such rights would be 

treated as ordinary income if realized in 

normal course by the partnership. The sale of 

a partnership interest or distributions to 

partners should not be permitted to change 

the character of this income. The statutory 

treatment proposed, in general, regards the 

income rights as severable from the 

partnership interest and as subject to the 

same tax consequences which would be 

accorded an individual entrepreneur. 

S. Rep. No. 1622 at 99 (1954), reprinted 

in 1954 U.S.C.C.A.N. 4621, 4732. 

(Emphasis added.) 

In 1984, Congress amended section 

704(c), making mandatory its 

application to property contributed to a 

partnership. While Congress did not 

specifically address the overlap of 

section 704(c) and section 751, the 

Conference Report indicates that the 

1984 Congress understood that the 

section 704(c) amendment would 

impact other provisions in subchapter K 

and provides regulatory authority to the 

Secretary of the Treasury to address 

those repercussions. See H.R. Conf. Rep. 

No. 861, 98th Cong., 2d Sess., June 23, 

1984, reprinted in 1984 U.S.C.C.A.N. 

1445, 1545. 

The IRS and the Treasury Department 

first issued regulations implementing 

section 751 in 1956. Following the 

changes to section 704(c) making its 

application mandatory, the IRS and the 

Treasury Department amended the 

regulations under section 751(a) to 

provide generally that a partner’s 

interest in section 751 property is the 

amount of income or loss from section 

751 property that would be allocated to 

the partner if the partnership had sold 

all of its property in a fully taxable 

transaction for cash in an amount equal 

to the fair market value of such 

property. (See TD 8847, 64 FR 69903, 

Dec. 15, 1999.) However, the 1956 

regulations with respect to section 

751(b) remained unchanged. 

The examples in the current 

regulations under section 751(b) 

determine a partner’s interest in section 

751 property by reference to the 

partner’s share of the gross value of the 

partnership’s assets (the ‘‘gross value’’ 

approach), not by reference to the 

partner’s share of the unrealized gain or 

loss in the property. See, for example, 

§ 1.751–1(g), Example 2. Because the 

gross value approach focuses on a 

partner’s share of the asset’s value rather 

than the partner’s share of the 

unrealized gain, the examples in the 

current regulations may be too narrow 

in some respects, and too broad in 

others, to carry out the intended 

purpose of section 751(b). That is, the 

gross value approach may allow a 

distribution that reduces a partner’s 

share of the unrealized gain in the 

partnership’s section 751 property 

without triggering section 751(b), and, 

conversely, may trigger section 751(b) 

even if the partner’s share of the 

unrealized gain in the partnership’s 

section 751 property is not reduced. For 

example, Rev. Rul. 84–102 (84–102 CB 

119) provides that deemed distributions 

under section 752 resulting from 

shifting allocations of indebtedness may 

result in the partners’ shares of asset 

gross value changing, even though the 

partners’ shares of unrealized gain 

associated with section 751 property 

would not necessarily have changed. 

If the distribution results in a shift 

between the partner’s interest in the 

partnership’s section 751 property and 

the partnership’s other property, the 

current regulations require a deemed 

asset exchange of both section 751 

property and other property between the 

partner and the partnership to 

determine the tax consequences of the 

distribution (the ‘‘asset exchange’’ 

approach). See, for example, § 1.751– 

1(g), Example 6, of the current 

regulations. The asset exchange 

approach is complex, requiring the 

partnership and partner to determine 

the tax consequences of both a deemed 

distribution of relinquished property 

and a deemed taxable exchange of that 

property back to the partnership. The 

asset exchange approach also often 

accelerates capital gain unnecessarily by 

requiring certain partners to recognize 

capital gain even when their shares of 

partnership capital gain have not been 

reduced. 

In 2006, the IRS and the Treasury 

Department published Notice 2006–14 

(2006–1 CB 498), which suggested, and 

requested comments on, alternative 

approaches to section 751(b) that were 

intended to better achieve the purpose 

of the statute while providing greater 

simplicity. See § 601.601(d)(2)(ii)(b). 

Specifically, Notice 2006–14 asked for 

comments on: (1) Replacing the gross 

value approach with a ‘‘hypothetical 

sale’’ approach for purposes of 

determining a partner’s interest in the 

partnership’s section 751 property, and 

(2) replacing the asset exchange 

approach with a ‘‘hot asset sale’’ 

approach to determine the tax 

consequences when section 751(b) 

applies. The hypothetical sale approach 

and the hot asset sale approach are 

described in Parts 1.A and 3, 

respectively, of the Summary of 

Comments and Explanation of 

Provisions section of this preamble. 

Notice 2006–14 also requested 

comments on other possible approaches 

to simplifying compliance with section 

751(b). 

As described in Notice 2006–14, the 

hypothetical sale approach for section 

751(b) is similar to the approach taken 

in the 1999 regulations issued under 

section 751(a), shifting the focus to tax 

gain and away from gross value. Under 

the hypothetical sale approach, a 

partner’s interest in section 751 

property is determined by reference to 

the amount of ordinary income that 

would be allocated to the partner if the 

partnership disposed of all of its 

property for fair market value 

immediately before the distribution. 

More specifically, the hypothetical sale 

approach applies section 704(c) 

principles in comparing: (1) The amount 

of ordinary income that each partner 

would recognize if the partnership sold 

all of its property for fair market value 

immediately before the distribution, 

with (2) the amount of ordinary income 

each partner would recognize if the 

partnership sold all of its property (and 

the distributee partners sold the 

distributed assets) for fair market value 

immediately after the distribution. If the 

distribution reduces the amount of 

ordinary income (or increases the 

amount of ordinary loss) from section 

751 property that would be allocated to, 

or recognized by, a partner (thus 

reducing that partner’s interest in the 

partnership’s section 751 property), the 

distribution triggers section 751(b). 

Notice 2006–14 indicated that 

changes to the framework of subchapter 

K since the promulgation of the existing 

regulations would work in tandem with 

the hypothetical sale approach to 

achieve the statute’s objective of 

ensuring that a partner recognizes its 

proper share of the partnership’s income 

from section 751 property without 

unnecessarily accelerating the 

recognition of that income. For example, 

regulations under section 704(b) allow a 

partnership to revalue its assets upon a 

distribution in consideration of a 

partnership interest. Any revaluation 

gain or loss is subject to the rules of 

section 704(c), which generally preserve 


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each partner’s share of the unrealized 

gain and loss in the partnership’s assets. 

Notice 2006–14 also requested 

comments on using the hot asset sale 

approach, rather than the asset exchange 

approach, to determine the tax 

consequences of the distribution that is 

subject to section 751(b). The hot asset 

sale approach deems the partnership to 

distribute the relinquished section 751 

property to the partner whose interest in 

the partnership’s section 751 property is 

reduced, and then deems the partner to 

sell the relinquished section 751 

property back to the partnership 

immediately before the actual 

distribution. 

Summary of Comments and 

Explanation of Provisions 

The IRS and the Treasury Department 

received both formal and informal 

responses to Notice 2006–14. In 

addition, a number of commentators 

published articles analyzing the 

proposals outlined in Notice 2006–14. 

Commentators’ responses to Notice 

2006–14 were predominantly favorable. 

These proposed regulations adopt 

many of the principles described in 

Notice 2006–14. Part 1 of this section 

describes the rules included in the 

proposed regulations for determining 

partners’ interests in section 751 

property. Part 2 of this section sets forth 

the proposed regulations’ test to 

determine whether section 751(b) 

applies to a partnership distribution, 

including anti-abuse principles that may 

apply in certain situations in which the 

test would not otherwise be satisfied. 

Part 3 of this section explains the tax 

consequences of a section 751(b) 

distribution under the proposed 

regulations. Finally, Part 4 of this 

section describes certain ancillary issues 

relating to the proposed regulations, 

including a clarification to the scope of 

§ 1.751–1(a). 

1. Determination of a Partner’s Interest 

in Section 751 Property 

Section 751(b) applies to a 

partnership distribution to the extent 

the distribution reduces a partner’s 

interest in section 751 property. As 

discussed further in this Part 1, the 

proposed regulations establish an 

approach for measuring partners’ 

interests in section 751 property, 

provide new rules under section 704(c) 

to help partnerships compute partner 

gain in section 751 property more 

precisely, and describe how basis 

adjustments under sections 734(b) and 

743(b) affect the computation of 

partners’ interests in section 751 

property. 

A. Adoption of Hypothetical Sale 

Approach 

The first step in computing the effect 

of section 751(b) is to measure the 

partners’ interests in section 751 

property. Commentators generally 

agreed that the hypothetical sale 

approach is a substantial improvement 

over the gross value approach in the 

existing regulations. As described in 

this preamble, the hypothetical sale 

approach requires a partnership to 

compare: (1) The amount of ordinary 

income (or ordinary loss) that each 

partner would recognize if the 

partnership sold its property for fair 

market value immediately before the 

distribution with (2) the amount of 

ordinary income (or ordinary loss) each 

partner would recognize if the 

partnership sold its property, and the 

distributee partner sold the distributed 

assets, for fair market value immediately 

after the distribution. The commentators 

agreed that, when compared against the 

gross value approach, the hypothetical 

sale approach is more consistent with 

Congress’s intent in enacting section 

751(b), is easier to apply, and reduces 

the likelihood that section 751(b) would 

unnecessarily accelerate ordinary 

income. Accordingly, these proposed 

regulations adopt the hypothetical sale 

approach as the method by which the 

partners must measure their respective 

interests in section 751 property for the 

purpose of determining whether a 

distribution reduces a partner’s interest 

in the partnership’s section 751 

property. (A distribution that reduces a 

partner’s interest in the partnership’s 

section 751 property is referred to as a 

‘‘section 751(b) distribution.’’) 

B. Revaluations 

Because the hypothetical sale 

approach relies on the principles of 

section 704(c) to preserve a partner’s 

share of the unrealized gain and loss in 

the partnership’s section 751 property, 

these proposed regulations make several 

changes to the regulations relating to 

section 704(c). Specifically, the 

proposed regulations revise § 1.704– 

1(b)(2)(iv)(f), regarding revaluations of 

partnership property, to make its 

provisions mandatory if a partnership 

distributes money or other property to a 

partner as consideration for an interest 

in the partnership, and the partnership 

owns section 751 property immediately 

after the distribution. (A partnership 

that does not own section 751 property 

immediately after the distribution may 

still revalue its property under the 

existing regulation, but is not required 

to do so under these proposed 

regulations.) If a partnership does not 

maintain capital accounts in accordance 

with § 1.704–1(b)(2)(iv), the partnership 

must comply with this requirement by 

computing each partner’s share of gain 

or loss in each partnership asset prior to 

a distribution, and making future 

allocations of partnership items in a 

manner that takes these amounts into 

account (making subsequent 

adjustments for cost recovery and other 

events that affect the property basis of 

each such asset). 

In addition, the proposed regulations 

contain a special revaluation rule for 

distributing partnerships that own an 

interest in a lower-tier partnership. 

Because a partnership’s section 751 

property includes, under section 751(f), 

the partnership’s proportionate share of 

section 751 property owned by any 

other partnership in which the 

distributing partnership is a partner, 

these proposed regulations also require 

a partnership in which the distributing 

partnership owns a controlling interest 

(which is defined as a greater than 50 

percent interest) to revalue its property 

if the lower-tier partnership owns 

section 751 property immediately after 

the distribution. If the distributing 

partnership owns a non-controlling (that 

is, less than or equal to 50 percent) 

interest in a lower-tier partnership, 

these proposed regulations require the 

distributing partnership to allocate its 

distributive share of the lower-tier 

partnership’s items among its partners 

in a manner that reflects the allocations 

that would have been made had the 

lower-tier partnership revalued its 

partnership property. The IRS and the 

Treasury Department are aware that in 

some instances a distributing 

partnership may be unable to obtain 

sufficient information to comply with 

this requirement from a lower-tier 

partnership in which the distributing 

partnership holds a non-controlling 

interest. We request comments on 

reasonable approaches to address this 

issue. 

Upon the revaluation of partnership 

property in connection with a 

partnership distribution, the regulations 

under section 704(c) permit a 

partnership to choose any reasonable 

method to account for the built-in gain 

or built-in loss that is consistent with 

the purpose of section 704(c). If 

property with built-in gain decreases in 

value (or property with built-in loss 

increases in value), then the partnership 

may be unable to allocate tax losses (or 

gains) to a non-contributing partner in 

an amount equal to the partner’s 

economic loss (or gain). If the property 

with built-in gain (or loss) is section 751 

property, then the inability to allocate 

those tax losses (or gains) may cause 


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ordinary income to shift among the 

partners. The regulations under section 

704(c) provide two reasonable methods 

for a partnership to allocate items to 

cure or remediate that shift. However, 

the regulations under section 704(c) also 

provide a third reasonable method, the 

traditional method, under which the 

shift of ordinary income is not cured. 

The IRS and the Treasury Department 

are aware that distortions created under 

the section 704(c) traditional method 

may cause ordinary income to shift 

among partners. However, the 

regulations under section 704(c) contain 

an anti-abuse rule that provides that a 

method is not reasonable if, for 

example, the event that results in a 

reverse section 704(c) allocation and the 

corresponding allocation of tax items 

with respect to the property are made 

with a view to shifting the tax 

consequences of built-in gain or built-in 

loss among the partners in a manner 

that substantially reduces the present 

value of the partners’ aggregate tax 

liability. The IRS and the Treasury 

Department believe that this anti-abuse 

provision under section 704(c) properly 

addresses the possibility that taxpayers 

would use the traditional method to 

shift ordinary income. 

Some commentators suggested 

changing the regulations under section 

704(c) to minimize the situations in 

which section 751(b) applies. Generally, 

when a partnership revalues its assets, 

the partnership allocates a reverse 

section 704(c) amount with respect to 

each partnership asset, as opposed to an 

aggregate section 704(c) amount with 

respect to all assets (subject to certain 

exceptions). As a result, any distribution 

of appreciated section 751 property in 

which another partner has a share of 

income would trigger section 751(b) 

under the hypothetical sale approach. 

The commentators recommended that 

the IRS and the Treasury Department 

narrow the application of section 751(b) 

by allowing partners (subject to the 

substantiality requirements of § 1.704– 

1(b)(2)(iii)) to ‘‘exchange’’ reverse 

section 704(c) amounts resulting from a 

section 751 distribution. These 

proposed regulations do not adopt this 

comment because it is beyond the scope 

of these regulations and would impact 

other provisions of subchapter K. 

However, the IRS and the Treasury 

Department believe that the issue merits 

further study and request comments on 

how such permissible exchanges of 

reverse section 704(c) amounts might be 

addressed in future regulations. 

C. Effect of Basis Adjustments on 

Section 751(b) Computations 

While section 704(c) revaluations 

generally preserve partners’ interests in 

section 751 property upon a partnership 

distribution, certain basis adjustments 

under sections 732(c) or 734(b) may 

alter partners’ interests in section 751 

property following the distribution. 

Accordingly, these proposed regulations 

provide rules on the effect of these basis 

adjustments on the computation of 

partners’ interests in section 751 

property. 

If a distribution of capital gain 

property results in a basis adjustment 

under section 734(b), that basis 

adjustment is allocated to capital gain 

property of the partnership under 

§ 1.755–1(c)(1). However, some property 

that is characterized as capital gain 

property for purposes of section 755 can 

also result in ordinary income when 

sold. For example, section 1231 

property is characterized as a capital 

asset for purposes of section 755, but 

selling the property can also result in 

ordinary income from recapture under 

section 1245(a)(1). The regulations 

under section 755 do not differentiate 

between the capital gain aspect of the 

property and the ordinary income 

aspect of the property for this purpose. 

Accordingly, allocating a section 734(b) 

positive basis adjustment to such 

property as capital gain property may 

reduce the amount of ordinary income 

that would result on a sale of the 

property. Under these proposed 

regulations, that reduction in ordinary 

income would constitute a reduction in 

the partners’ shares of unrealized gain 

in the partnership’s section 751 

property, which could trigger section 

751(b) in situations in which 751(b) 

would not have otherwise applied. A 

similar reduction in section 751 

property could occur if the basis of the 

distributed property increases under 

section 732. 

One commentator recommended 

allowing partnerships to avoid this 

result by eliminating a positive section 

734(b) adjustment to the extent the 

section 734(b) adjustment would reduce 

the partnership’s ordinary income. 

Another commentator recommended 

allocating the section 734(b) adjustment 

to other partnership capital gain 

property. The same commentator 

alternatively recommended treating a 

positive section 734(b) adjustment that 

reduced the partnership’s ordinary 

income as a separate asset. 

Although these proposed regulations 

do not treat the section 734(b) 

adjustment as a separate asset, the 

proposed regulations reach a similar 

result to this last recommendation. They 

provide that a basis adjustment under 

section 732(c) or section 734(b) (as 

adjusted for recovery of the basis 

adjustment) that is allocated to capital 

gain property and that reduces the 

ordinary income (attributable, for 

example, to recapture under section 

1245(a)(1)) that the partner or 

partnership would recognize on a 

taxable disposition of the property is not 

taken into account in determining (1) 

the partnership’s basis for purposes of 

sections 617(d)(1), 1245(a)(1), 

1250(a)(1), 1252(a)(1), and 1254(a)(1), 

and (2) the partner or partnership’s 

respective gain or loss for purposes of 

sections 995(c), 1231(a), and 1248(a). 

The IRS and the Treasury Department 

intend for these amendments to apply 

for purposes of other provisions that 

cross-reference those sections (for 

example, the reference in § 1.367(b)–2(c) 

to section 1248). The IRS and the 

Treasury Department are aware that 

these rules may result in additional 

administrative burden and, therefore, 

permit a partnership and its partners to 

elect to recognize ordinary income 

currently under section 751(b) in lieu of 

applying these rules. 

In addition, one commentator raised 

questions about the application of 

section 751(b) upon the distribution to 

a partner of section 751 property for 

which another partner has a basis 

adjustment under section 743(b) (the 

transferee partner). The commentator 

questioned whether the distributee 

partner’s share of section 751 property 

could be increased inappropriately if 

the special basis adjustment is not taken 

into account in determining the 

distributee’s basis in the section 751 

property under section 732. The IRS and 

the Treasury Department believe that 

although the distributee partner does 

not take the section 743(b) basis 

adjustment into account in determining 

its basis in the distributed property, the 

reallocation of the section 743(b) basis 

adjustment pursuant to § 1.743– 

1(g)(2)(ii) should generally reduce the 

transferee partner’s share of section 751 

property, triggering an income inclusion 

to that partner under section 751(b) 

which is offset by the basis adjustment. 

The IRS and the Treasury Department 

acknowledge that, in situations in 

which the partnership holds no other 

section 751 property (and the section 

743(b) basis adjustment is temporarily 

suspended under §§ 1.743–1(g)(2)(ii) 

and 1.755–1(c)(4) until the partnership 

acquires additional ordinary income 

property), the application of section 

751(b) may be unclear. Accordingly, the 

proposed regulations require that 


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partners include the effect of carryover 

basis adjustments when determining 

their shares of section 751 property, as 

though those basis adjustments were 

immediately allocable to ordinary 

income property. See Example 4 in 

§ 1.751–1(g) of the proposed regulations. 

2. Distributions to Which Section 751(b) 

Applies 

A. General Principle 

The purpose of section 751 is to 

prevent a partner from converting its 

share of potential ordinary income into 

capital gain. A distribution of 

partnership property (including money) 

is a section 751(b) distribution if the 

distribution reduces any partner’s share 

of net section 751 unrealized gain or 

increases any partner’s share of net 

section 751 unrealized loss (as 

determined under the hypothetical sale 

approach described in Part 1.A of the 

Summary of Comments and Explanation 

of Provisions section of this preamble). 

For this purpose, a partner’s net section 

751 unrealized gain or loss immediately 

before a distribution equals the amount 

of net gain or loss, as the case may be, 

from section 751 property that would be 

allocated to the partner if the 

partnership disposed of all of the 

partnership’s assets for cash in an 

amount equal to the fair market value of 

such property (taking into account 

section 7701(g)). A partner’s net section 

751 unrealized gain or loss includes any 

remedial allocations under § 1.704–3(d). 

A partner’s net section 751 unrealized 

gain or loss also takes into account any 

section 743 basis adjustment pursuant 

to § 1.743–1(j)(3), including any 

carryover basis adjustment that results 

under any of § 1.743–1(g)(2)(ii), § 1.755– 

1(b)(5)(iii)(D), or § 1.755–1(c)(4) when 

the partnership must adjust the basis of 

a specific class of assets, but that 

adjustment is suspended because the 

partnership does not own assets in that 

class. The regulations take such 

suspended basis adjustments into 

account as though the basis adjustment 

is applied to the basis of notional 

partnership section 751 property with a 

fair market value of zero. For example, 

if A and B are partners in the AB 

partnership, which owns capital assets 

and a single ordinary income asset that 

is the subject of a section 743(b) 

adjustment with respect to B, and that 

asset is distributed to partner A, B’s 

basis adjustment is suspended because 

the partnership lacks other ordinary 

income property. However, the basis 

adjustment will eventually benefit B 

when the partnership acquires new 

ordinary income property. For this 

reason, the proposed regulations require 

B to take the suspended adjustment into 

account when determining whether 

section 751(b) applies to B with respect 

to the distribution. 

A partner’s share of net section 751 

unrealized gain or loss from section 751 

property immediately following a 

distribution is computed using the same 

formula. However, the distributee 

partner also includes in its postdistribution amount its share of net 

income or loss from a hypothetical sale 

of the distributed section 751 property. 

If section 751(b) applies to a 

distribution, each partner must 

generally recognize or take into account 

currently ordinary income equal to its 

‘‘section 751(b) amount.’’ If a partner 

has net section 751 unrealized gain both 

before and after the distribution, then 

the partner’s section 751(b) amount 

equals the partner’s net section 751 

unrealized gain immediately before the 

distribution less the partner’s net 

section 751 unrealized gain immediately 

after the distribution. If a partner has net 

section 751 unrealized loss both before 

and after the distribution, then the 

partner’s section 751(b) amount equals 

the partner’s net section 751 unrealized 

loss immediately after the distribution 

less the partner’s net section 751 

unrealized loss immediately before the 

distribution. If a partner has net section 

751 unrealized gain before the 

distribution and net section 751 

unrealized loss after the distribution, 

then the partner’s section 751(b) amount 

equals the sum of the partner’s net 

section 751 unrealized gain immediately 

before the distribution and the partner’s 

net section 751 unrealized loss 

immediately after the distribution. 

Commentators requested a de minimis 

exception to section 751(b). The IRS and 

the Treasury Department continue to 

study the issue and request comments 

describing the parameters of a de 

minimis rule that would be helpful. 

B. Section 751 Anti-Abuse Rule 

The IRS and the Treasury Department 

believe that, despite the general 

principle that section 751(b) should 

apply only at the time that a partner’s 

share of net section 751 unrealized gain 

is reduced (or net section 751 loss is 

increased), the deferral of ordinary 

income upon the receipt of a 

distribution is inappropriate in certain 

circumstances. Specifically, deferral is 

inappropriate if a partner engages in a 

transaction that relies on the rules of 

section 704(c) to defer or eliminate 

ordinary income while monetizing most 

of the value of the partnership interest. 

Accordingly, these proposed regulations 

provide an anti-abuse rule that requires 

taxpayers to apply the rules set forth in 

the proposed regulations in a manner 

consistent with the purpose of section 

751, and that allows the Commissioner 

to recast transactions for federal tax 

purposes as appropriate to achieve tax 

results that are consistent with the 

purpose of section 751. 

The proposed regulations provide a 

list of situations that are presumed 

inconsistent with the purpose of section 

751. Under this list, a distribution is 

presumed inconsistent with the purpose 

of section 751 if section 751(b) would 

apply but for the application of section 

704(c) principles, and one or more of 

the following conditions exists: (1) A 

partner’s interest in net section 751 

unrealized gain is at least four times 

greater than the partner’s capital 

account immediately after the 

distribution, (2) a distribution reduces a 

partner’s interest to such an extent that 

the partner has little or no exposure to 

partnership losses and does not 

meaningfully participate in partnership 

profits aside from a preferred return for 

the use of capital, (3) the net value of 

the partner (or its successor) becomes 

less than its potential tax liability from 

section 751 property as a result of a 

transaction, (4) a partner transfers a 

portion of its partnership interest within 

five years after the distribution to a taxindifferent party in a manner that would 

not trigger ordinary income recognition 

in the absence of this anti-abuse rule, or 

(5) a partnership transfers to a 

corporation in a nonrecognition 

transaction section 751 property other 

than pursuant to a transfer of all 

property used in a trade or business 

(excluding assets that are not material to 

a continuation of the trade or business). 

In addition, the proposed regulations 

provide that an amendment to the 

partnership agreement that results in a 

reduction in a partner’s interest in 

section 751 property is also presumed 

inconsistent with the purpose of section 

751. A partnership or a partner taking a 

position on its return that section 751 

does not apply to a transaction that 

meets one or more of these situations 

must disclose its position on Form 8275, 

Disclosure Statement. 

3. Tax Consequences of a Section 751(b) 

Distribution 

If section 751(b) applies to a 

distribution under the principles set 

forth in Part 2 of the Summary of 

Comments and Explanation of 

Provisions section of this preamble, 

then the partners must determine the 

consequences of its application to the 

partnership and its partners. As 

described in the Background section of 

this preamble, Notice 2006–14 

discussed replacing the asset exchange 


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approach with a hot asset sale approach 

to determine these consequences. While 

most commentators agreed that the hot 

asset sale approach is an improvement 

over the existing regulations’ asset 

exchange approach, commentators were 

able to identify situations in which the 

hot asset sale approach fails to achieve 

the correct result or causes undesirable 

results under other Code provisions. 

Two commentators advocated adopting, 

in lieu of the hot asset sale approach, an 

approach similar to that taken in section 

704(c)(1)(B) (referred to in this preamble 

as a ‘‘deemed gain’’ approach), in which 

a section 751(b) distribution results in: 

(1) The partnership recognizing 

ordinary income in the aggregate 

amount of each partner’s reduction in 

the partner’s interest in section 751 

property, (2) the partnership allocating 

ordinary income to the partner or 

partners whose interest in section 751(b) 

property was reduced by the 

distribution, and (3) the partnership 

making appropriate basis adjustments to 

its assets to reflect its ordinary income 

recognition. One variation of the 

deemed gain approach would require 

capital gain recognition in certain cases. 

The IRS and the Treasury Department 

determined that a deemed gain 

approach produces an appropriate 

outcome in the greatest number of 

circumstances out of the approaches 

under consideration, and that the hot 

asset sale approach also produced an 

appropriate outcome in most 

circumstances. However, no one 

approach produced an appropriate 

outcome in all circumstances. 

Therefore, these proposed regulations 

withdraw the asset exchange approach 

of the current regulations, but do not 

require the use of a particular approach 

for determining the tax consequences of 

a section 751(b) distribution. Instead, 

these proposed regulations provide that 

if, under the hypothetical sale approach, 

a distribution reduces a partner’s 

interest in the partnership’s section 751 

property, giving rise to a section 751(b) 

amount, then the partnership must use 

a reasonable approach that is consistent 

with the purpose of section 751(b) to 

determine the tax consequences of the 

reduction. Except in limited situations, 

a partnership must continue to use the 

same approach, once chosen, including 

after a termination of the partnership 

under section 708(b)(1)(B). These 

proposed regulations include examples 

in which the approach adopted is 

generally reasonable based on the facts 

of the examples, and one example in 

which it is determined that the adopted 

approach is not reasonable based on the 

facts of the example. 

Finally, some commentators 

recommended allowing taxpayers to 

elect to recognize capital gain in certain 

situations (for example, in the situation 

described in Example 2 in Notice 2006– 

14 involving distributions of section 

751(b) property to a partner that has 

insufficient basis in its partnership 

interest to absorb fully the partnership’s 

basis in the distributed property). 

Recognition of gain may be appropriate 

where failing to recognize gain would 

cause an adjustment to the basis of 

distributed property (under section 732) 

or to the basis of partnership property 

(under section 734(b)) if those basis 

adjustments would change the partners’ 

shares of ordinary income already 

determined under the principles 

described in Part 1 of the Summary of 

Comments and Explanation of 

Provisions section of this preamble. 

Such changes in ordinary income 

amounts could (in the case of certain 

adjustments under section 734(b)) 

decrease partners’ shares of partnership 

ordinary income, requiring the 

recognition of additional income under 

section 751(b), or could (in the case of 

certain adjustments under section 732) 

convert a distributee partner’s share of 

capital gain into ordinary income. Thus, 

these proposed regulations require that 

distributee partners recognize capital 

gain in certain situations, and permit 

distributee partners to elect to recognize 

capital gain in certain other situations. 

The proposed regulations require a 

distributee partner to recognize capital 

gain to the extent necessary to prevent 

the distribution from triggering a basis 

adjustment under section 734(b) that 

would reduce other partners’ shares of 

net unrealized section 751 gain or loss. 

Capital gain recognition is necessary in 

this situation because the section 734(b) 

basis adjustment was not taken into 

account in determining the partners’ net 

section 751 unrealized gain or loss 

immediately after the section 751 

distribution, and the IRS and the 

Treasury Department believe that an 

approach under which a partnership 

redetermines a partner’s net section 751 

unrealized gain or loss to account for 

section 734(b) basis adjustments would 

be both administratively burdensome 

and would accelerate ordinary income 

unnecessarily. See Examples 5 and 6 in 

§ 1.751–1(g) of the proposed regulations. 

Gain recognized in this event is 

generally capital; however, if the 

partnership makes an election under 

§ 1.755–1(c)(2)(vi), then the partner 

must characterize all or a portion of the 

gain recognized under this rule as 

ordinary income or a dividend, as 

appropriate, to preserve the character of 

the gain in the adjusted asset. See 

Example 9 in § 1.751–1(g) of the 

proposed regulations. 

These proposed regulations also allow 

distributee partners to elect to recognize 

capital gain in certain circumstances to 

avoid decreases to the basis of 

distributed section 751 property. 

Elective capital gain recognition is 

appropriate to eliminate a negative 

section 732(a)(2) or (b) basis adjustment 

to the asset or assets received in 

distribution if, and to the extent that, 

the distributee partner’s net section 751 

unrealized gain would otherwise be 

greater immediately after the 

distribution than it was immediately 

before the distribution (or would cause 

the distributee partner’s net section 751 

unrealized loss to be less immediately 

after the distribution than it was 

immediately before the distribution). 

For example, elective capital gain 

recognition is appropriate if a partner 

with zero basis in its partnership 

interest receives a distribution of 

partnership section 751 property with 

basis in the hands of the partnership 

equal to its value, and the distribution 

otherwise increases the distributee 

partner’s net section 751 unrealized 

gain. 

4. Miscellaneous 

A. Section 751(a) 

As described in Parts 2.A and 2.B of 

this preamble, these proposed 

regulations generally defer the 

recognition of ordinary income upon a 

distribution when the partner’s 

unrealized gain and loss in the 

partnership’s section 751 property is 

preserved through the application of the 

principles of section 704(c). This 

approach is consistent with the 1984 

amendment to section 704(c). By 

mandating the application of section 

704(c) principles, that amendment 

partially severed the relationship that 

had generally existed between a 

partner’s distributive share (that is, the 

right to share in the economic gain or 

loss) associated with a partnership item 

and the partner’s share of tax gain or 

loss from the sale of that item. The IRS 

and the Treasury Department believe 

that, by mandating the application of 

section 704(c) principles in 1984, 

Congress intended that impacted 

provisions be interpreted consistent 

with this new emphasis on tax gain or 

loss. Congress provided a broad 

delegation of authority to the Treasury 

Department to address these 

repercussions of amending section 

704(c) on other provisions in subchapter 

K. 


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Some commentators interpret section 

751(a) as limiting the amount of 

ordinary income that a transferor 

partner may recognize upon a transfer of 

a partnership interest to the amount of 

any money or property received by the 

transferor partner, without taking into 

account the total amount of ordinary 

income attributable to the partnership 

interest transferred that relates to 

section 751 property. However, 

interpreting section 751(a) as limiting 

ordinary income in this way would 

contravene Congress’s intent to tax 

partners on their shares of partnership 

ordinary income as determined by 

applying section 704(c) principles. The 

IRS and the Treasury Department 

believe that section 751(a) should be 

interpreted in a manner that accounts 

for the impact of section 704(c). Thus, 

these proposed regulations provide that 

the amount of money or the fair market 

value of property received for purposes 

of section 751(a) takes into account the 

transferor partner’s share of income or 

gain from section 751 property. 

The IRS and the Treasury Department 

alternatively considered addressing this 

issue by deeming a partner that sells or 

exchanges its partnership interest to 

receive a distribution of the partner’s 

share of the section 751 property, 

followed by a sale of the property back 

to the partnership for its fair market 

value, recognizing the deferred ordinary 

income inherent in the section 751 

property. The partner would then be 

deemed to contribute the cash proceeds 

to the partnership thereby increasing the 

partner’s basis in the partner’s 

partnership interest. Finally, upon the 

sale or exchange of the partnership 

interest, the partner would recognize the 

appropriate amount of capital loss. This 

potential multi-step deemed approach 

would result in additional complexity 

and would reach the same result that 

the current regulations under § 1.751– 

1(a) reach as clarified by these proposed 

regulations. Therefore, the IRS and the 

Treasury Department are not proposing 

this alternative approach. 

B. Previously Contributed Property 

Exception 

Section 751(b)(2)(A) provides that 

section 751(b) does not apply to a 

distribution of property that the 

distributee contributed to the 

partnership (‘‘previously contributed 

property exception’’). Unlike other 

provisions in subchapter K that include 

similar previously contributed property 

exceptions, the current regulations 

under section 751(b) do not contain 

successor rules for purposes of applying 

the section 751(b) previously 

contributed property exception. These 

proposed regulations add successor 

rules to section 751(b) similar to the 

successor rules contained in other 

previously contributed property 

exceptions within subchapter K. 

C. Mergers and Divisions 

A commentator requested guidance 

confirming how the rules of section 

751(b) apply in the case of an 

incorporation, merger, or division of a 

partnership. The proposed regulations 

do not adopt this comment because the 

IRS and the Treasury Department 

believe such guidance is beyond the 

scope of these proposed regulations. 

D. Substantial Appreciation Test 

These proposed regulations also make 

a number of technical corrections to 

account for changes in the law since the 

issuance of existing regulations under 

section 751. For example, these 

proposed regulations remove the 

language ‘‘substantially appreciated’’ 

from the first sentence of § 1.751– 

1(a)(1), which applies with respect to 

sales or exchanges of an interest in a 

partnership. In addition to conforming 

the language of the regulations to that of 

the Code, this change is intended to 

clarify that, upon a sale or exchange of 

a partnership interest, unrealized 

receivables and inventory items are 

treated in the same manner. Thus, a 

transferor partner may recognize an 

ordinary loss with respect to inventory 

items pursuant to section 751(a) to the 

extent the transferor would be allocated 

a net ordinary loss pursuant to § 1.751– 

1(a)(2). These proposed regulations also 

update the definition of ‘‘inventory 

items which have appreciated 

substantially in value’’ with respect to 

section 751(b) to reflect the 1993 

amendment to the statute that 

eliminated the 10-percent test from the 

definition of ‘‘substantial appreciation.’’ 

See Public Law 103–66, Sec. 

13206(e)(1). These proposed regulations 

also clarify that unrealized receivables 

are not included in the term ‘‘inventory 

items which have appreciated 

substantially in value.’’ 

E. Other Changes Relating to 

Revaluations 

Finally, these proposed regulations 

address some of the comments received 

in response to Notice 2009–70 (2009–2 

CB 255), in which the IRS and the 

Treasury Department requested 

comments on, among other things, 

whether additional events should be 

added to the list of events permitting a 

revaluation of partnership property 

pursuant to § 1.704–1(b)(2)(iv)(f) and 

whether, in a tiered partnership 

structure, a revaluation at one 

partnership in the tier should permit 

another partnership in the tier to 

revalue that partnership’s property. 

Commentators recommended that 

partnership recapitalizations (changes to 

the way partners agree to share 

partnership profits and losses) be added 

as a permissible revaluation event. The 

IRS and the Treasury Department agree 

that partnership recapitalizations 

should be added as a permissible event 

because, absent providing for a special 

allocation of any unrealized gain or loss 

in partnership assets that arose prior to 

the recapitalization, a revaluation is 

necessary to preserve each partner’s 

share of such unrealized amounts. In 

addition, commentators recommended 

that a partnership in a tiered 

partnership structure be able to revalue 

its partnership property if another 

partnership in the tiered structure was 

permitted to revalue its partnership 

property. The IRS and the Treasury 

Department agree and believe that 

permitting successive revaluations in a 

tiered partnership structure is necessary 

to properly allocate items with respect 

to a reverse section 704(c) allocation to 

the appropriate partner. 

Availability of IRS Documents 

IRS notices cited in this preamble are 

made available by the Superintendent of 

Documents, U.S. Government Printing 

Office, Washington, DC 20402. 

Effect on Other Documents 

The following publication will be 

obsolete as of the date of publication of 

a Treasury decision adopting these rules 

as final regulations in the Federal 

Register: 

Rev. Rul. 84–102 (1984–2 CB 119). 

Proposed Effective/Applicability Date 

The regulations, as proposed, apply to 

distributions occurring in any taxable 

period ending on or after the date of 

publication of a Treasury decision 

adopting these rules as final regulations 

in the Federal Register. The rules 

contained in § 1.751–1(a)(2) would 

apply to transfers of partnership 

interests that occur on or after 

November 3, 2014. However, the rules 

contained in § 1.751–1(a)(2) are a 

clarification of existing rules, and no 

inference is intended from the change to 

§ 1.751–1(a)(2) with respect to sales or 

exchanges of partnership interests prior 

to the effective date for § 1.751–1(a)(2). 

The rules contained in § 1.751–1(a)(3) 

continue to apply to transfers of 

partnership interests that occur on or 

after December 15, 1999. A partnership 

and its partners would be able to rely on 

§ 1.751–1(b)(2) of these proposed 

regulations for purposes of determining 


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a partner’s interest in the partnership’s 

section 751 property on or after 

November 3, 2014 provided the 

partnership and its partners apply each 

of § 1.751–1(a)(2), § 1.751–1(b)(2), and 

§ 1.751–1(b)(4) of these proposed 

regulations consistently for all 

partnership distributions and sales or 

exchanges, including for any 

distributions and sales or exchanges the 

partnership makes after a termination of 

the partnership under section 

708(b)(1)(B). 

Special Analyses 

It has been determined that this notice 

of proposed rulemaking is not a 

significant regulatory action as defined 

in Executive Order 12866, as 

supplemented by Executive Order 

13653. Therefore, a regulatory 

assessment is not required. It has also 

been determined that section 553(b) of 

the Administrative Procedure Act (5 

U.S.C. chapter 5) does not apply to these 

regulations. It is hereby certified that the 

collection of information in these 

regulations will not have a significant 

economic impact on a substantial 

number of small entities. This 

certification is based on the fact that the 

amount of time necessary to prepare the 

required disclosure is not lengthy and 

few small businesses are likely to be 

partners or partnerships required to 

make the disclosures required by the 

rule. Accordingly, a Regulatory 

Flexibility Analysis under the 

Regulatory Flexibility Act (5 U.S.C. 

chapter 6) does not apply. Pursuant to 

section 7805(f) of the Code, this notice 

of proposed rulemaking has been 

submitted to the Chief Counsel for 

Advocacy of the Small Business 

Administration for comment on its 

impact on small business. 

Comments and Requests for Public 

Hearing 

The IRS and the Treasury Department 

request comments on all aspects of the 

proposed rules. In particular, the IRS 

and the Treasury Department request 

comments, in addition to those 

previously requested in this preamble, 

on: (1) Whether and how carryover 

adjustments to ordinary income 

property under sections 734(b) and 

743(b) should be taken into account 

under the hypothetical sale approach, 

(2) whether the final regulations should 

exclude certain types of transactions 

from the previously contributed 

property successor rules provided in 

these proposed regulations, (3) whether 

the regulations should specifically 

describe approaches as generally 

reasonable approaches for determining 

the tax consequences of a section 751(b) 

distribution, and which approaches 

should be specified as generally 

reasonable, (4) whether the final 

regulations should provide rules similar 

to those proposed in new § 1.755– 

1(c)(2)(iii) through (vi) in § 1.755–1(b)(5) 

with respect to section 743(b) 

adjustments in substituted basis 

transactions, and (5) what disclosures 

the IRS and the Treasury Department 

should require from partners and 

partnerships that either recognize gain 

under section 751(a) or (b), or rely on 

reverse section 704(c) allocations to 

defer the gain recognition required by 

section 751(a) or (b). 

The IRS and the Treasury Department 

also request comments on a topic that, 

although not specific to section 751, 

may impact the rules under section 751. 

The IRS and the Treasury Department 

are aware that the regulations under 

§ 1.1245–1(e)(3) (concerning the 

interaction of section 1245 and section 

743), and § 1.1250–1(f), by reference to 

§ 1.1245–1(e)(3), are out of date. The 

intent of the regulations under § 1.1245– 

1(e)(3) is, in part, to ensure that a 

transferee partner does not recognize 

ordinary income with respect to section 

1245 property to the extent a section 

743 adjustment has displaced that 

ordinary income. For example, if a 

partner sells in a fully taxable exchange 

its interest in a partnership that has 

elected under section 754, and the 

selling partner recognizes ordinary 

income under section 751(a) with 

respect to partnership section 1245 

property, then the rules under sections 

1245 and 743 are intended to ensure 

that the transferee partner recognizes no 

ordinary income on an immediately 

subsequent disposition of the section 

1245 property in a fully taxable 

transaction. However, the regulations 

under § 1.1245–1(e)(3) have not been 

amended to take into account changes to 

subchapter K, including the regulations 

under section 751, resulting in issues 

and uncertainties. The IRS and the 

Treasury Department are studying these 

issues and request comments in this 

area. 

Finally, the IRS and the Treasury 

Department request comments as to how 

section 751(b) should interact with rules 

for withholding and reporting with 

respect to nonresident aliens and 

foreign corporations. For example, the 

IRS and the Treasury Department are 

considering whether regulations should 

provide that for purposes of 

withholding under chapter 3 of Subtitle 

A (for example, under section 1446), 

income recognized as a result of a 

section 751(b) distribution is treated as 

recognized by the partnership regardless 

of the approach chosen to determine the 

U.S. tax consequences of the section 

751(b) distribution. The IRS and the 

Treasury Department are also 

considering whether additional 

guidance with respect to tax or 

information returns (for example, 

pursuant to section 6031(b) or section 

6050K) is necessary for gain recognized 

on section 751(b) distributions affecting 

these taxpayers. 

Before these proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

comments that are submitted timely to 

the IRS as prescribed in this preamble 

under the ‘‘Addresses’’ heading. All 

comments will be available at 

www.regulations.gov or upon request. A 

public hearing will be scheduled if 

requested in writing by any person who 

submits timely written or electronic 

comments. If a public hearing is 

scheduled, notice of the date, time, and 

place for the public hearing will be 

published in the Federal Register. 

Drafting Information 

The principal authors of these 

regulations are Allison R. Carmody and 

Frank J. Fisher, Office of the Associate 

Chief Counsel (Passthroughs and 

Special Industries). However, other 

personnel from the IRS and the Treasury 

Department participated in their 

development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

Authority: 26 U.S.C. 7805 * * * 

■ Par. 2. Section 1.617–4 is amended by 

adding a new sentence at the end of 

paragraph (c)(3)(ii)(g) to read as follows: 

§ 1.617–4 Treatment of gain from 

disposition of certain mining property. 

* * * * * 

(c) * * * 

(3) * * * 

(ii) * * * 

(g) * * * See also §§ 1.732–1(c)(2)(iii) 

and 1.755–1(c)(2)(iii) for rules governing 

the application of section 617 to 

partnership property in certain 

situations. 

* * * * * 

■ Par. 3. Section 1.704–1 is amended 

by: 


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■ a. Revising paragraph (b)(2)(iv)(f) 

introductory text. 

■ b. Redesignating paragraph 

(b)(2)(iv)(f)(5)(v) as paragraph 

(b)(2)(iv)(f)(5)(vi). 

■ c. Adding new paragraph 

(b)(2)(iv)(f)(5)(v). 

■ d. Designating the undesignated text 

after paragraph (b)(2)(iv)(f)(5)(vi) as 

paragraph (b)(2)(iv)(f)(5)(vii). 

The revisions and additions read as 

follows: 

§ 1.704–1 Partner’s distributive share. 

* * * * * 

(b) * * * 

(2) * * * 

(iv) * * * 

(f) Revaluations of property. A 

partnership agreement may, upon the 

occurrence of certain events, and must 

in the circumstances described in 

§ 1.751–1(b)(2)(iv), increase or decrease 

the capital accounts of the partners to 

reflect a revaluation of partnership 

property (including intangible assets 

such as goodwill) on the partnership’s 

books. If a partnership that revalues its 

property pursuant to this paragraph 

owns an interest in another partnership, 

that partnership in which it owns an 

interest may also revalue its property in 

accordance with this section. Similarly, 

if an interest in a partnership that 

revalues its property pursuant to this 

paragraph is owned by another 

partnership, the partnership owning 

that interest may also revalue its 

property in accordance with this 

section. Capital accounts so adjusted 

will not be considered to be determined 

and maintained in accordance with the 

rules of this paragraph (b)(2)(iv) 

unless— 

* * * * * 

(5) * * * 

(v) In connection with an agreement 

to change (other than a de minimis 

change) the manner in which the 

partners share any item or class of items 

of income, gain, loss, deduction or 

credit of the partnership under the 

partnership agreement, or 

* * * * * 

■ Par. 4. Section 1.704–3 is amended in 

paragraph (a)(9) by adding a sentence 

immediately following the first sentence 

to read as follows: 

§ 1.704–3 Contributed property. 

(a) * * * 

(9) * * * If a partnership (the uppertier partnership) owns an interest in 

another partnership (the lower-tier 

partnership), and both the upper-tier 

partnership and the lower-tier 

partnership simultaneously revalue 

partnership property pursuant to 

§ 1.704–1(b)(2)(iv)(f), the principles of 

this paragraph (a)(9) shall apply to any 

reverse section 704(c) allocations 

created upon the revaluation. * * * 

* * * * * 

■ Par. 5. Section 1.732–1 is amended by 

adding paragraphs (c)(2)(iii), (iv), (v), 

(vi), and (vii), and revising paragraph 

(c)(5) to read as follows: 

§ 1.732–1 Basis of distributed property 

other than money. 

* * * * * 

(c) * * * 

(2) * * * 

(iii) Property subject to section 1245. 

Any increase in basis allocated to 

capital gain property pursuant to the 

second sentence in paragraph (c)(2)(ii) 

of this section is not taken into account 

in determining the recomputed or 

adjusted basis in the property for 

purposes of section 1245(a)(1). 

Notwithstanding the prior sentence, any 

depreciation or amortization of the 

increase in basis that is allowed or 

allowable is taken into account in 

computing the property’s recomputed 

basis. In the case of property that is 

subject to section 617(d)(1), section 

1250(a)(1), section 1252(a)(1), or section 

1254(a)(1), rules similar to the rule in 

this paragraph (c)(2)(iii) shall apply. See 

Examples 2 and 3 in § 1.755–1(c)(6). 

(iv) Section 1231 property. Any 

increase in basis allocated to capital 

gain property pursuant to the second 

sentence in paragraph (c)(2)(ii) of this 

section is not taken into account in 

determining section 1231 gain and loss, 

as defined in section 1231(a)(3). See 

Examples 2 and 3 in § 1.755–1(c)(6). 

(v) Property subject to section 1248. 

Any increase in basis allocated to stock 

in a foreign corporation pursuant to the 

second sentence in paragraph (c)(2)(ii) 

of this section or any decrease in basis 

allocated to stock in a foreign 

corporation pursuant to the second 

sentence in paragraph (c)(2)(i) of this 

section is not taken into account in 

determining the amount of gain 

recognized on the sale or exchange of 

such stock for purposes of section 

1248(a). In the case of property that is 

subject to section 995(c), rules similar to 

the rule set forth in this paragraph 

(c)(2)(v) shall apply. See Examples 8 

and 9 in § 1.751–1(g). 

(vi) Special rule. Any basis 

adjustment to an asset that is not taken 

into account under paragraph (c)(2)(iii), 

(iv), or (v) of this section shall, upon a 

taxable disposition, be treated as gain or 

loss, as the case may be, from the sale 

or exchange of a capital asset with the 

same holding period as the underlying 

asset. See Examples 2 and 3 in § 1.755– 

1(c)(6). 

(vii) Election not to apply the 

provisions of paragraphs (c)(2)(iii), (iv), 

and (v). See § 1.755–1(c)(2)(vi) for rules 

regarding an election to have the 

provisions of paragraphs (c)(2)(iii), (iv), 

and (v) of this section, and § 1.755– 

1(c)(2)(iii), (iv), and (v) not apply. See 

Examples 2 and 3 in § 1.755–1(c)(6). 

* * * * * 

(5) Effective/applicability date. This 

paragraph (c) applies to distributions of 

property from a partnership that occur 

on or after December 15, 1999, except 

that paragraphs (c)(2)(iii), (iv), (v), (vi), 

and (vii) of this section apply to 

distributions of property from a 

partnership that occur on or after the 

date of publication of a Treasury 

decision adopting these rules as final 

regulations in the Federal Register. 

* * * * * 

§ 1.736–1 [Amended] 

■ Par. 6. Section 1.736–1 is amended in 

paragraph (b)(4) by removing the 

language ‘‘paragraph (b)(3)(iii)’’ from the 

last sentence and adding the language 

‘‘paragraph (b)(3)’’ in its place. 

■ Par. 7. Section 1.751–1 is amended 

by: 

■ a. Revising paragraphs (a)(1) and (2). 

■ b. Revising the first sentence of 

paragraph (b)(1)(i) and adding a new 

sentence at the end of paragraph 

(b)(1)(i). 

■ c. Removing the last four sentences of 

paragraph (b)(1)(ii). 

■ d. Revising paragraphs (b)(1)(iii) and 

(b)(2) and (3). 

■ e. Redesignating paragraphs (b)(4) and 

(5) as paragraphs (b)(5) and (6). 

■ f. Adding a new paragraph (b)(4). 

■ g. Revising the paragraph heading of 

newly designated paragraph (b)(5). 

■ h. Further redesignating newly 

redesignated paragraph (b)(5)(ii) as 

paragraph (b)(5)(vi) and adding 

paragraphs (b)(5)(ii), (iii), (iv), and (v). 

■ i. Revising newly designated 

paragraph (b)(6). 

■ j. Revising paragraph (c)(4)(vi). 

■ k. Adding paragraph (c)(4)(x). 

■ l. Removing paragraphs (c)(5) and (6). 

■ m. Revising the first and second 

sentences of paragraph (d)(1). 

■ n. Revising paragraphs (e), (f), and (g). 

The additions and revisions read as 

follows: 

§ 1.751–1 Unrealized receivables and 

inventory items. 

(a) * * * (1) Character of amount 

realized. To the extent that money or 

property received by a partner in 

exchange for all or part of his 

partnership interest is attributable to his 

share of the value of partnership 

unrealized receivables or inventory 

items, the money or fair market value of 


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the property received shall be 

considered as an amount realized from 

the sale or exchange of property other 

than a capital asset. The remainder of 

the total amount realized on the sale or 

exchange of the partnership interest is 

realized from the sale or exchange of a 

capital asset under section 741. For 

definition of ‘‘unrealized receivables’’ 

and ‘‘inventory items,’’ see section 

751(c) and (d). See paragraph (e) of this 

section for the definition of section 751 

property. 

(2) Determination of gain or loss. The 

income or loss realized by a partner 

upon the sale or exchange of its interest 

in section 751 property is the amount of 

income or loss from section 751 

property (taking into account allocations 

of tax items applying the principles of 

section 704(c), including any remedial 

allocations under § 1.704–3(d), and any 

section 743 basis adjustment pursuant 

to § 1.743–1(j)(3)) that would have been 

allocated to the partner (to the extent 

attributable to the partnership interest 

sold or exchanged) if the partnership 

had sold all of its property in a fully 

taxable transaction for cash in an 

amount equal to the fair market value of 

such property (taking into account 

section 7701(g)) immediately prior to 

the partner’s transfer of the interest in 

the partnership. Any gain or loss 

recognized that is attributable to section 

751 property will be ordinary gain or 

loss. The difference between the amount 

of capital gain or loss that the partner 

would realize in the absence of section 

751 and the amount of ordinary income 

or loss determined under this paragraph 

(a)(2) is the transferor’s capital gain or 

loss on the sale of its partnership 

interest. For purposes of section 751(a) 

and paragraph (a) of this section, the 

amount of money or the fair market 

value of property received by the 

partner in exchange for all or part of his 

partnership interest must take into 

account the partner’s share of income or 

gain from section 751 property. See 

Example 1 in paragraph (g) of this 

section. See § 1.460–4(k)(2)(iv)(E) for 

rules relating to the amount of ordinary 

income or loss attributable to a contract 

accounted for under a long-term 

contract method of accounting. 

* * * * * 

(b) Certain distributions treated as 

sales or exchanges—(1) In general. (i) 

Certain distributions to which section 

751(b) applies are treated in whole or in 

part as sales or exchanges of property, 

and not as distributions to which 

sections 731 through 736 apply. * * * 

For purposes of section 751 and this 

section, a partner’s interest in the 

partnership’s section 751 property 

includes allocations of tax items 

applying the principles of section 

704(c). 

* * * * * 

(iii) If a distribution is a section 751(b) 

distribution, as described in paragraph 

(b)(2)(i) of this section, the tax 

consequences of the section 751(b) 

distribution, as determined under 

paragraph (b)(3) of this section, shall 

first apply, and then the rules of 

sections 731 through 736 shall apply. 

See paragraph (b)(5)(vi) of this section 

for treatment of payments under section 

736(a). 

(2) Distributions to which section 

751(b) applies—(i) Section 751(b) 

amount. A distribution is a section 

751(b) distribution if it gives rise to a 

‘‘section 751(b) amount’’ for any 

partner. A partner’s section 751(b) 

amount (if any) associated with a 

distribution of partnership property 

(including money) equals the greatest 

of— 

(A) The amount by which the 

partner’s net section 751 unrealized gain 

immediately before the distribution 

exceeds the partner’s net section 751 

unrealized gain immediately after the 

distribution; 

(B) The amount by which the 

partner’s net section 751 unrealized loss 

immediately after the distribution 

exceeds the partner’s net section 751 

unrealized loss immediately before the 

distribution; and 

(C) The amount of the partner’s net 

section 751 unrealized gain immediately 

before the distribution, increased by the 

total amount of the partner’s net section 

751 unrealized loss immediately after 

the distribution (where neither of those 

numbers equals zero). 

(ii) Net section 751 unrealized gain or 

loss before a distribution. A partner’s 

net section 751 unrealized gain or loss 

immediately before a distribution equals 

the amount of net income or loss, as the 

case may be, from section 751 property 

that would be allocated to the partner if 

the partnership disposed of all of the 

partnership’s assets for cash in an 

amount equal to the fair market value of 

such property (taking into account 

section 7701(g)). For this purpose, a 

partner’s net section 751 unrealized gain 

or loss includes any remedial 

allocations under § 1.704–3(d), and 

takes into account any section 743 basis 

adjustment pursuant to § 1.743–1(j)(3) 

and any carryover basis adjustment 

described in §§ 1.743–1(g)(2)(ii), 1.755– 

1(b)(5)(iii)(D), or 1.755–1(c)(4) as though 

the carryover basis adjustment was 

applied to the basis of new partnership 

section 751 property with fair market 

value of zero. 

(iii) Net section 751 unrealized gain 

or loss after a distribution. A partner’s 

net section 751 unrealized gain or loss 

immediately after a distribution equals 

the sum of (to the extent applicable)— 

(A) With respect to a partner 

remaining in the partnership 

immediately after the distribution 

(including a distributee partner 

remaining in the partnership), the 

amount of net income or loss, as the 

case may be (including any remedial 

allocations under § 1.704–3(d) and 

taking into account any section 743 

basis adjustment pursuant to § 1.743– 

1(j)(3) and any carryover basis 

adjustment described in §§ 1.743– 

1(g)(2)(ii), 1.755–1(b)(5)(iii)(D), or 

1.755–1(c)(4) as though the carryover 

basis adjustment was applied to the 

basis of new partnership section 751 

property with fair market value of zero), 

from section 751 property that would be 

allocated to the partner if the 

partnership disposed of all of the 

partnership’s assets for cash in an 

amount equal to the fair market value of 

such property (taking into account 

section 7701(g)); and 

(B) With respect to a partner receiving 

a distribution, the amount of net income 

or loss, as the case may be, from section 

751 property that would be recognized 

by the distributee if, immediately after 

the distribution, the distributee 

disposed of the distributed assets for 

cash in an amount equal to the fair 

market value of such property (taking 

into account section 7701(g)). 

(iv) Revaluation of assets. For a 

partnership that distributes money or 

property (other than a de minimis 

amount) to a partner as consideration 

for an interest in the partnership, and 

that owns section 751 property 

immediately after the distribution, if the 

partnership maintains capital accounts 

in accordance with § 1.704–1(b)(2)(iv), 

the partnership must revalue its assets 

immediately prior to the distribution in 

accordance with § 1.704–1(b)(2)(iv)(f). If 

a partnership does not maintain capital 

accounts in accordance with § 1.704– 

1(b)(2)(iv), the partnership must comply 

with this section by computing its 

partners’ shares of partnership gain or 

loss immediately before the distribution 

as if the partnership assets were sold for 

cash in a fully taxable transaction 

(taking into account section 7701(g)), 

and by taking those computed shares of 

gain or loss into account under the 

principles of section 704(c) (making 

subsequent adjustments for cost 

recovery and other events that affect the 

basis of the property). In addition, if the 

partnership (upper-tier partnership) 

owns another partnership directly or 

indirectly through one or more 


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partnerships (lower-tier partnership), 

and the same persons own, directly or 

indirectly (through one or more 

entities), more than 50 percent of the 

capital and profits interests in both the 

upper-tier partnership and the lowertier partnership, the lower-tier 

partnership must also revalue its assets 

immediately prior to the distribution in 

accordance with § 1.704–1(b)(2)(iv)(f) if 

the lower-tier partnership owns section 

751 property. If the same persons do not 

own, directly or indirectly, more than 

50 percent of the capital and profits 

interests in both the upper-tier 

partnership and the lower-tier 

partnership, the upper-tier partnership 

must allocate its distributive share of 

the lower-tier partnership’s items among 

its partners in a manner that reflects the 

allocations that would have been made 

had the lower-tier partnership revalued 

its property. 

(3) Tax consequences of a section 

751(b) distribution—(i) Reasonable 

approach. In the case of a section 751(b) 

distribution described in paragraph 

(b)(2) of this section, the partnership 

must choose a reasonable approach that 

is consistent with the purpose of section 

751(b) under which each partner with a 

section 751(b) amount recognizes 

ordinary income (or takes it into 

account by eliminating a basis 

adjustment) equal to that section 751(b) 

amount immediately prior to the section 

751(b) distribution. In certain 

circumstances described in paragraph 

(b)(3)(ii) of this section, a distributee 

partner may also be permitted or 

required to recognize capital gain. To be 

reasonable, an approach must conform 

to the general principles and anti-abuse 

rules described in paragraph (b)(4) of 

this section. An approach is not 

necessarily unreasonable merely 

because another approach would result 

in a higher aggregate tax liability. Once 

the partnership has adopted a 

reasonable approach, it must apply that 

approach consistently for all section 

751(b) distributions, including for any 

distributions the partnership makes 

after a termination of the partnership 

under section 708(b)(1)(B). If the 

application of the adopted approach to 

a later section 751(b) distribution 

produces results inconsistent with the 

purpose of section 751, the partnership 

must adopt another reasonable approach 

that achieves the purposes of section 

751 for that distribution only. See 

Example 3 through Example 8 in 

paragraph (g) of this section. 

(ii) Gain Recognition—(A) Mandatory 

recognition. A partner’s net section 751 

unrealized gain or net section 751 

unrealized loss for purposes of 

paragraph (b)(3)(i) of this section is 

determined before taking into account 

any basis adjustments required by 

paragraph (b)(3)(iii) of this section. In 

certain instances, the application of 

paragraph (b)(3)(iii) of this section may 

cause a partner to receive distributed 

property with a basis that differs from 

the basis of the property in the hands of 

the distributing partnership. If an 

adjustment to the basis of the 

distributed section 751 property results 

in a section 734(b) basis adjustment, and 

that basis adjustment would have 

altered the amount of net section 751 

unrealized gain or loss computed under 

paragraph (b)(2) of this section if the 

section 734(b) adjustment had been 

included immediately prior to the 

distribution, then the distributee partner 

must recognize capital gain immediately 

prior to the distribution in an amount 

sufficient to eliminate that section 

734(b) basis adjustment. See Examples 5 

and 6 in paragraph (g) of this section. If, 

however, the partnership makes an 

election under § 1.755–1(c)(2)(vi), then 

the partner must characterize all or a 

portion of the gain recognized under 

this paragraph as ordinary income or a 

dividend, as appropriate, to preserve the 

character of the gain in the adjusted 

asset. See Example 9 in paragraph (g) of 

this section. 

(B) Elective recognition. A distributee 

partner may elect to recognize capital 

gain (in addition to amounts required to 

be recognized under this section) to 

eliminate section 732(a)(2) or (b) basis 

adjustments to the asset or assets 

received in distribution if, and to the 

extent that, the basis adjustments 

required by paragraph (b)(3)(iii) of this 

section would otherwise cause the 

distributee partner’s net section 751 

unrealized gain to be greater 

immediately after the distribution than 

it was immediately before the 

distribution or would cause the 

distributee partner’s net section 751 

unrealized loss to be less immediately 

after the distribution than it was 

immediately before the distribution. A 

distributee partner elects under this 

paragraph (b)(3)(ii)(B) by providing the 

partnership with written notification of 

its intent to make the election and 

reporting the capital gain on its return. 

An extension of time to make an 

election under this paragraph 

(b)(3)(ii)(B) will not be granted under 

§ 301.9100–3 of this chapter. The 

requirement in paragraph (b)(1)(i) of this 

section that a partnership apply a 

chosen reasonable method consistently 

across all partnership distributions does 

not apply for purposes of this 

paragraph. See Example 7 in paragraph 

(g) of this section. 

(iii) Adjustments to Basis. The 

partnership and its partners must make 

appropriate adjustments to the adjusted 

basis of the partners’ interests in the 

partnership, and of section 751 property 

and other property held by the 

partnership or partners, in a manner 

consistent with the adopted approach to 

reflect any ordinary income or capital 

gain recognized upon application of 

paragraph (b)(3) of this section, and 

section 704(c) amounts must be adjusted 

accordingly. 

(4) General principles and anti-abuse 

rules. (i) The purpose of section 751 is 

to prevent a partner from converting its 

rights to ordinary income into capital 

gain, including by relying on the rules 

of section 704(c) to defer ordinary 

income while monetizing most of the 

value of the partnership interest. The 

partnership and all partners of the 

partnership must apply the rules of 

section 751 and § 1.751–1 in a manner 

consistent with the purpose of section 

751. Accordingly, if a principal purpose 

of a transaction is to achieve a tax result 

that is inconsistent with the purpose of 

section 751, the Commissioner may 

recast the transaction for federal tax 

purposes as appropriate to achieve tax 

results that are consistent with the 

purpose of section 751. The 

Commissioner will determine whether a 

tax result is inconsistent with the 

purpose of section 751 based on all the 

facts and circumstances. The existence 

of one or more of the situations set forth 

below is presumed to establish that a 

transaction is inconsistent with the 

purpose of section 751 and disclosure to 

the Internal Revenue Service in 

accordance with § 1.751–1(b)(4)(ii) is 

required. 

(A) Circumstances in which a partner 

received a distribution that would 

otherwise be subject to section 751(b), 

but for the application of the principles 

of section 704(c), and one or more of the 

following conditions exist (whether at 

the time of the distribution or, in the 

case of paragraph (b)(4)(i)(A)(2), (3), (4), 

or (5) of this section, a later date): 

(1) The partner’s interest in net 

section 751 unrealized gain is at least 

four times greater than the partner’s 

capital account immediately after the 

distribution, pursuant to § 1.704– 

1(b)(2)(iv) (or comparable amount for 

partnerships not maintaining capital 

accounts under § 1.704–1(b)(2)(iv)); 

(2) The partner is substantially 

protected from losses from the 

partnership’s activities and has little or 

no participation in the profits from the 

partnership’s activities other than a 

preferred return that is in the nature of 

a payment for the use of capital; 


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(3) The partner engages in a 

transaction that, at the time of the 

transaction, causes the net value of the 

partner (or its successor) to be less than 

the tax liability that the partner (or its 

successor) would incur with respect to 

its interest in the partnership’s section 

751 property upon a sale of its 

partnership interest for its fair market 

value at the time of the transaction. For 

this purpose, the net value of the 

partner (or its successor) equals— 

(i) The fair market value of all assets 

owned by the partner (or its successor) 

that may be subject to creditor’s claims 

under local law (including the partner’s 

enforceable right to contributions from 

its owner or owners), less 

(ii) All obligations of the partner (or 

its successor) other than the partner’s 

obligation with respect to the tax 

liability for which the net value is being 

determined; 

(4) The partner transfers a portion of 

its partnership interest within five years 

after the distribution in a manner that 

does not trigger ordinary income 

recognition, and ordinary income or 

gain with respect to the partnership 

interest is subject to Federal income tax 

in the hands of the transferor partner 

immediately before the transfer, but any 

ordinary income or gain with respect to 

the partnership interest is exempt from, 

or otherwise not subject to, Federal 

income tax in the hands of the 

transferee partner immediately after the 

transfer; 

(5) The partnership transfers to a 

corporation in a nonrecognition 

transaction section 751 property other 

than pursuant to a transfer of all 

property used in a trade or business 

(excluding assets that are not material to 

a continuation of the trade or business); 

or 

(B) The partners agree to change 

(other than a de minimis change) the 

manner in which the partners share any 

item or class of items of income, gain, 

loss, deduction or credit of the 

partnership under the partnership 

agreement and that change reduces the 

partner’s net section 751 unrealized 

gain. 

(ii) If a partner participates in a 

transaction described in paragraph 

(b)(4)(i)(A) or (B) of this section and 

does not recognize and report its share 

of ordinary income from section 751 

property on its tax return for the taxable 

year of the transaction, the partner must 

file Form 8275–R, Regulation Disclosure 

Statement, or any appropriate successor 

form, disclosing its participation in the 

transaction for the taxable year in which 

the transaction occurred. 

(5) Special rules. * * * 

* * * * * 

(ii) The transferee in a nonrecognition 

transaction of all or a portion of the 

partnership interest of a contributing 

partner is treated as the contributing 

partner for purposes of section 751(b)(2) 

in an amount attributable to the interest 

transferred. 

(iii) For purposes of section 751(b)(2), 

if a partnership disposes of contributed 

section 751 property in a 

nonrecognition transaction, the 

substituted basis property (within the 

meaning of section 7701(a)(42)) received 

in exchange for such substituted basis 

property is treated as the contributed 

section 751 property with regard to the 

contributing partner. If a partnership 

transfers contributed section 751 

property together with other property in 

a nonrecognition transaction, the 

substituted basis property (within the 

meaning of section 7701(a)(42)) is 

treated as the contributed section 751 

property with regard to the contributing 

partner in the same proportion as the 

fair market value of the contributed 

section 751 property, at the time of the 

transfer, bears to the fair market value 

of the other property transferred at the 

time of the transfer. If a transfer 

described in this paragraph (b)(5)(iii) 

was in exchange for an interest in an 

entity, the interest in the entity will not 

be treated as the contributed section 751 

property with regard to the contributing 

partner to the extent the value of the 

interest is attributable to other property 

the partnership contributed to the 

entity. 

(iv) For purposes of section 751(b)(2), 

an interest in an entity previously 

contributed to the partnership is not 

treated as previously contributed 

property to the extent the value of the 

interest is attributable to property the 

partnership contributed to the entity 

after the interest was contributed to the 

partnership. The preceding sentence 

does not apply to the extent that the 

property contributed to the entity was 

contributed to the partnership by the 

partner that also contributed the interest 

in the entity to the partnership. 

(v) For purposes of section 751(b)(2), 

the distribution of an undivided interest 

in property is treated as the distribution 

of previously contributed property to 

the extent that the undivided interest 

does not exceed the undivided interest, 

if any, contributed by the distributee 

partner in the same property. 

* * * * * 

(6) Statements required—(i) 

Partnership. A partnership that makes a 

section 751(b) distribution must submit 

with its return for the year of the 

distribution a statement for each section 

751(b) distribution made during the year 

that includes the following: 

(A) A caption identifying the 

statement as the disclosure of a section 

751(b) distribution and the date of the 

distribution; and 

(B) A brief description of the 

reasonable approach adopted by the 

partnership pursuant to paragraph 

(b)(3)(i) of this section for recognizing 

the ordinary income; if applicable, the 

capital gain required to be recognized; 

and if relevant, whether the approach 

varies from an approach previously 

adopted within any of the three tax 

years preceding the current tax year. 

(ii) Partner. A partnership that makes 

a section 751(b) distribution during the 

partnership’s tax year must submit with 

its return for the year of the distribution 

a statement for each partner that has a 

section 751(b) amount greater than $0 in 

connection with that distribution. The 

statement must be attached to the 

statement for that partner required by 

section 6031(b) and § 1.6031(b)–1T(a), 

and must include the following: 

(A) The date of the section 751(b) 

distribution; 

(B) The amount of ordinary income 

the partner recognized pursuant to 

paragraph (b)(3)(i) of this section; and 

(C) The amount of capital gain the 

partner recognized, if any, pursuant to 

paragraph (b)(3)(ii)(A) or (B) of this 

section. 

(c) * * * 

(4) * * * 

(vi) With respect to any taxable year 

of a partnership beginning after July 18, 

1984, amounts treated as ordinary 

income under section 467 are treated as 

ordinary income under this section in 

the same manner as amounts treated as 

ordinary income under section 1245 

(see paragraph (c)(4)(iii) of this section) 

or section 1250 (see paragraph (c)(4)(v) 

of this section). 

* * * * * 

(x) With respect to any taxable year of 

a partnership beginning after July 18, 

1984, the term unrealized receivables, 

for purposes of this section and sections 

731, 732, and 741 (but not for purposes 

of section 736), includes any market 

discount bond (as defined in section 

1278) and any short-term obligation (as 

defined in section 1283) but only to the 

extent of the amount that would be 

treated as ordinary income if (at the 

time of the transaction described in this 

section or section 731, 732, or 741, as 

the case may be) such property had been 

sold by the partnership. 

* * * * * 

(d) Inventory items which have 

substantially appreciated in value— (1) 

Substantial appreciation. Partnership 


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inventory items shall be considered to 

have appreciated substantially in value 

if, at the time of the distribution, the 

total fair market value of all the 

inventory items of the partnership 

exceeds 120 percent of the aggregate 

adjusted basis for such property in the 

hands of the partnership (without regard 

to any special basis adjustment to the 

partner). The terms ‘‘inventory items 

which have appreciated substantially in 

value’’ or ‘‘substantially appreciated 

inventory items’’ refer to the aggregate 

of all partnership inventory items but do 

not include any unrealized receivables. 

* * * 

* * * * * 

(e) Section 751 property and other 

property. For purposes of paragraph (a) 

of this section, section 751 property 

means unrealized receivables or 

inventory items. For purposes of 

paragraph (b) of this section, section 751 

property means unrealized receivables 

or substantially appreciated inventory 

items. For purposes of all paragraphs of 

this section, other property means all 

property (including money) that is not 

section 751 property. 

(f) Applicability date. The rules 

contained in paragraph (a)(2) of this 

section apply to transfers of partnership 

interests that occur on or after 

November 3, 2014. The rules contained 

in paragraph (a)(3) of this section apply 

to transfers of partnership interests that 

occur on or after December 15, 1999. 

The rules contained in paragraphs (b)(2) 

and (3) of this section apply to 

distributions of partnership property 

that occur on or after the date of 

publication of a Treasury decision 

adopting these rules as final regulations 

in the Federal Register. However, a 

partnership and its partners may apply 

the rules contained in paragraph (b)(2) 

of this section for purposes of 

determining a partner’s interest in the 

partnership’s section 751 property on or 

after November 3, 2014, provided the 

partnership and its partners apply 

paragraphs (a)(2), (b)(2), and (b)(4) of 

this section consistently for all 

partnership sales, exchanges, and 

distributions, including for any 

distributions the partnership makes 

after a termination of the partnership 

under section 708(b)(1)(B). 

(g) Examples. Application of the 

provisions of section 751 may be 

illustrated by the following examples. In 

each of Examples 2 through 9 of this 

paragraph (g), none of the section 751 

property qualifies as property that the 

distributee previously contributed as 

described in section 751(b)(2)(A), and 

no distribution to a retiring partner is a 

payment described in section 736(a): 

Example 1. (i)(A) A and B are equal 

partners in personal service partnership PRS. 

A contributed nondepreciable capital assets 

(the ‘‘Capital Assets’’) to PRS with a basis 

and fair market value of $14,000. B 

contributed unrealized receivables described 

in paragraph (c) of this section (the 

‘‘Unrealized Receivables’’) to PRS with a 

basis of zero and fair market value of 

$14,000. Later, when the fair market value of 

the Capital Assets had declined to $2,000, B 

transferred its interest in PRS to T for $9,000 

when PRS’s balance sheet (reflecting a cash 

receipts and disbursements method of 

accounting) was as follows: 

Adjusted basis Fair market 

value 

Assets 

Cash ......................................................................................................................................................................... $ 4,000 $ 4,000 

Capital Assets .......................................................................................................................................................... 14,000 2,000 

Unrealized Receivables ........................................................................................................................................... 0 14,000 

Total .................................................................................................................................................................. 18,000 20,000 

Liabilities and Capital 

Liabilities .................................................................................................................................................................. $2,000 $2,000 

Capital: 

A ....................................................................................................................................................................... 15,000 9,000 

B ....................................................................................................................................................................... 1,000 9,000 

Total ........................................................................................................................................................... 18,000 20,000 

(B) The total amount realized by B is 

$10,000, consisting of the cash received, 

$9,000, plus $1,000, B’s share of the 

partnership liabilities assumed by T. See 

section 752. B’s interest in the partnership 

property includes an interest in the 

partnership’s Unrealized Receivables. B’s 

basis in its partnership interest is $2,000 

($1,000, plus $1,000, B’s share of partnership 

liabilities). If section 751(a) did not apply to 

the sale, B would recognize $8,000 of capital 

gain from the sale of the interest in PRS. 

However, section 751(a) does apply to the 

sale. 

(ii) For purposes of section 751(a), the 

amount of money or the fair market value of 

property received by the partner in exchange 

for all or part of his partnership interest must 

take into account the partner’s share of 

income or gain from section 751 property. If 

PRS sold all of its section 751 property in a 

fully taxable transaction immediately prior to 

the transfer of B’s partnership interest to T, 

B would have been allocated $14,000 of 

ordinary income from the sale of PRS’s 

Unrealized Receivables under section 704(c). 

Therefore, B will recognize $14,000 of 

ordinary income with respect to the 

Unrealized Receivables. The difference 

between the amount of capital gain or loss 

that the partner would realize in the absence 

of section 751 ($8,000) and the amount of 

ordinary income or loss determined under 

paragraph (a)(2) of this section ($14,000) is 

the transferor’s capital gain or loss on the sale 

of its partnership interest. In this case, B will 

recognize a $6,000 capital loss. 

Example 2. (i) A, B, and C each contribute 

$120 to partnership ABC in exchange for a 

1/3 interest. A, B, and C each share in the 

profits and losses of ABC in accordance with 

their 1/3 interest. ABC purchases land for 

$100 in Year 1. At the end of Year 3, when 

ABC holds $260 in cash and land with a 

value of $100 and has generated $90 in zerobasis unrealized receivables, ABC distributes 

$50 cash to C in a current distribution, 

reducing C’s interest in ABC from 1/3 to 

1/4. ABC has a section 754 election in effect. 

To determine if the distribution is a 

distribution to which section 751(b) applies, 

ABC must apply the test set forth in 

paragraph (b)(2) of this section. 

(ii)(A) Pursuant to paragraph (b)(2)(iv) of 

this section, ABC revalues its assets and its 

partners’ capital accounts are increased 

under § 1.704–1(b)(2)(iv)(f) to reflect each 

partner’s share of the unrealized gain in the 

partnership’s assets. Before the distribution, 

ABC’s balance sheet is as follows: 


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Tax Book Capital Tax Book 

Cash ........................................................................................................... $260 $260 A $120 $150 

Unrealized Receivable ............................................................................... 0 90 B 120 150 

Real Property ............................................................................................. 100 100 C 120 150 

Totals .................................................................................................. 360 450 360 450 

(B) If ABC disposed of all of its assets for 

cash in an amount equal to the fair market 

value of such property immediately before 

the distribution, A, B, and C would each be 

allocated $30 of net income from ABC’s 

section 751 property. Accordingly, A, B, and 

C’s net section 751 unrealized gain 

immediately before the distribution is $30 

each under paragraph (b)(2)(ii) of this 

section. 

(iii)(A) After the distribution (but before 

taking into account any consequences under 

this section), ABC’s balance sheet would be 

as follows: 

Tax Book Capital Tax Book 

Cash ........................................................................................................... $210 $210 A $120 $150 

Unrealized Receivable ............................................................................... 0 90 B 120 150 

Real Property ............................................................................................. 100 100 C 70 100 

Totals .................................................................................................. 310 400 310 400 

(B) If ABC disposed of all of its assets in 

exchange for cash in amounts equal to the 

fair market values of those assets 

immediately after the distribution, A, B, and 

C would each still be allocated $30 of net 

income from ABC’s section 751 property 

pursuant to § 1.704–3(a)(6). C did not receive 

any section 751 property in the distribution. 

Accordingly, A, B, and C’s net section 751 

unrealized gain immediately after the 

distribution is $30 each under paragraph 

(b)(2)(iii) of this section. 

(iv) Because no partner’s net section 751 

unrealized gain is greater immediately before 

the distribution than immediately after the 

distribution, and because no partner’s net 

section 751 unrealized loss is greater 

immediately after the distribution than 

immediately before the distribution, the 

distribution is not a section 751(b) 

distribution under paragraph (b)(2)(i) of this 

section. Accordingly, section 751(b) does not 

apply to the distribution. 

Example 3. (i) Assume the same facts as 

in Example 2 of this paragraph (g), but 

assume ABC distributes $150 cash to C in 

complete liquidation of C’s interest. To 

determine if the distribution is a distribution 

to which section 751(b) applies, ABC must 

apply the test set forth in paragraph (b)(2) of 

this section. 

(ii)(A) Pursuant to paragraph (b)(2)(iv) of 

this section, ABC revalues its assets and its 

partners’ capital accounts are increased 

under § 1.704–1(b)(2)(iv)(f) to reflect each 

partner’s share of the unrealized gain in the 

partnership’s assets. Before the distribution, 

ABC’s balance sheet is as follows: 

Tax Book Capital Tax Book 

Cash ........................................................................................................... $260 $260 A $120 $150 

Unrealized Receivable ............................................................................... 0 90 B 120 150 

Real Property ............................................................................................. 100 100 C 120 150 

Totals .................................................................................................. 360 450 360 450 

(B) If ABC disposed of all of its assets in 

exchange for cash in amounts equal to the 

fair market values of these assets 

immediately before the distribution, A, B, 

and C would each be allocated $30 of net 

income from ABC’s section 751 property. 

Accordingly, A, B, and C’s net section 751 

unrealized gain immediately before the 

distribution is $30 each under paragraph 

(b)(2)(ii) of this section. 

(iii)(A) Because ABC has elected under 

section 754, and because A recognizes $30 

gain on the distribution of cash, the basis of 

the real property is increased to $130 under 

section 734(b). After the distribution (but 

before taking into account any consequences 

under this section), ABC’s balance sheet 

would be as follows: 

Tax Book Capital Tax Book 

Cash ........................................................................................................... $110 $110 A $120 $150 

Unrealized Receivable ............................................................................... 0 90 B 120 150 

Real Property ............................................................................................. 130 100 C 0 0 

Totals .................................................................................................. 240 300 240 300 

(B) Because C is no longer a partner in 

ABC, C would not be allocated any net 

income from ABC’s section 751 property 

immediately after the distribution. Also, C 

did not receive any section 751 property in 

the distribution. Accordingly, C’s net section 

751 unrealized gain immediately after the 

distribution is $0 under paragraph (b)(2)(iii) 

of this section. 

(iv) Because C’s net section 751 unrealized 

gain is greater immediately before the 

distribution than immediately after the 

distribution, section 751(b) applies to the 

distribution. Under paragraph (b)(2)(i) of this 

section, C has a section 751(b) amount equal 

to $30, the amount by which C’s share of predistribution net section 751 unrealized gain 

($30) exceeds C’s share of post-distribution 

net section 751 unrealized gain ($0). 

Accordingly, paragraph (b)(3)(i) of this 

section requires C to recognize $30 of 

ordinary income using a reasonable approach 

consistent with the purpose of this section. 

ABC considers two approaches, the first of 

which is described in paragraphs (v) and (vi) 

of this example, and the second of which is 

described in paragraphs (vii) and (viii) of this 

example. 


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(v) Assume ABC adopts an approach under 

which, immediately before the section 751(b) 

distribution, C is deemed to recognize $30 of 

ordinary income. To reflect C’s recognition of 

$30 of ordinary income, C increases its basis 

in its ABC partnership interest by $30, and 

the partnership increases its basis in the 

unrealized receivable by the $30 of income 

recognized by C, immediately before the 

distribution. Provided the partnership 

applies the approach consistently for all 

section 751(b) distributions, ABC’s adopted 

approach is reasonable. After taking into 

account the tax consequences of the section 

751(b) distribution immediately prior to the 

cash distribution, ABC’s modified balance 

sheet is as follows: 

Tax Book Capital Tax Book 

Cash ........................................................................................................... $260 $260 A $120 $150 

Unrealized Receivable ............................................................................... 30 90 B 120 150 

Real Property ............................................................................................. 100 100 C 150 150 

Totals .................................................................................................. 390 450 390 450 

(vi) After determining the tax 

consequences of the section 751(b) 

distribution, the rules of sections 731 through 

736 apply. Accordingly, C recognizes no gain 

or loss under section 731(a) upon the 

distribution. Because C recognizes no gain on 

the distribution, the basis of the partnership 

real property is not adjusted. After the 

distribution, ABC’s balance sheet is as 

follows: 

Tax Book Capital Tax Book 

Cash ........................................................................................................... $110 $110 A $120 $150 

Unrealized Receivable ............................................................................... 30 90 B 120 150 

Real Property ............................................................................................. 100 100 C 0 0 

Totals .................................................................................................. 240 300 240 300 

(vii) Assume alternatively that ABC adopts 

an approach under which, immediately 

before the section 751(b) distribution, C is 

deemed to— 

(A) Receive a distribution of ABC’s 

unrealized receivables with a fair market 

value of $30 and a tax basis of $0; 

(B) Sell the unrealized receivable to ABC 

in exchange for $30, recognizing $30 of 

ordinary income; and 

(C) Contribute the $30 to ABC. Provided 

the partnership applies the approach 

consistently for all section 751(b) 

distributions, ABC’s adopted approach is 

reasonable. After taking into account the tax 

consequences of the section 751(b) 

distribution immediately prior to the cash 

distribution, ABC’s modified balance sheet is 

the same as the balance sheet shown in 

paragraph (v) of this example. 

(viii) After determining the tax 

consequences of the section 751(b) 

distribution, the rules of sections 731 through 

736 apply. The tax consequences under the 

rules of sections 731 through 736 are the 

same tax consequences described in 

paragraph (vi) of this example. 

Example 4. (i) A and B are equal partners 

in a partnership, AB, that owns Unrealized 

Receivable with a fair market value of $50 

and nondepreciable real property with a 

basis of $50 and a fair market value of $100. 

A has an adjusted basis in its partnership 

interest of $25, and B has an adjusted basis 

in its partnership interest of $50. The 

partnership has a section 754 election in 

effect, and B has a basis adjustment under 

section 743(b) of $25 that is allocated to 

Unrealized Receivable. AB distributes 

Unrealized Receivable to A in a current 

distribution. To determine if the distribution 

is a distribution to which section 751(b) 

applies, AB must apply the test set forth in 

paragraph (b)(2) of this section. 

(ii)(A) AB makes a non-mandatory 

revaluation of its assets and its partners’ 

capital accounts are increased under § 1.704– 

1(b)(2)(iv)(f) to reflect each partner’s share of 

the unrealized gain in the partnership’s 

assets. Before the distribution, AB’s balance 

sheet is as follows: 

Tax Basis adj. Book Capital Tax Special 

basis Book 

Unrealized Receivable ............................... 0 25 50 A 25 .................... 75 

Real Property ............................................. 50 .................... 100 B 25 25 75 

Totals .................................................. 50 25 150 50 25 150 

(B) If AB disposed of all of its assets in 

exchange for cash in amounts equal to the 

fair market values of these assets 

immediately before the distribution, A and B 

would each be allocated $25 of net income 

from AB’s section 751 property. However, B’s 

net income from Unrealized Receivable 

would be offset by its $25 section 743 

adjustment. § 1.743–1(j)(3). Accordingly, A 

and B’s net section 751 unrealized gain 

immediately before the distribution are $25 

and $0, respectively, under paragraph 

(b)(2)(ii) of this section. 

(iii)(A) After the distribution (but before 

taking into account any consequences under 

this section), AB’s balance sheet would be as 

follows: 

Tax Basis adj. Book Capital Tax Carryover 

adjustment Book 

Carryover Adjustment ................................ .................... 25 0 A 25 .................... 25 

Real Property ............................................. 50 .................... 100 B 25 25 75 

Totals .................................................. 50 25 100 50 25 100 


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(B) If AB disposed of all of its assets in 

exchange for cash in amounts equal to the 

fair market values of those assets 

immediately after the distribution, no partner 

would be allocated net income or loss from 

section 751 property. However, B has a 

carryover basis adjustment to ordinary 

income property of $25 under §§ 1.743– 

1(g)(2)(ii) and 1.755–1(c)(4), which B must 

treat as applied to section 751 property with 

fair market value of $0 pursuant to paragraph 

(b)(2)(ii) of this section. Accordingly, B’s net 

section 751 unrealized loss immediately after 

the distribution is $25 under paragraph 

(b)(2)(iii)(A) of this section. If, immediately 

after the distribution, A disposed of 

Unrealized Receivable in exchange for $50 

cash, A would recognize $50 of net income 

from section 751 property. Accordingly, A’s 

net section 751 unrealized gain immediately 

after the distribution is $50 under paragraph 

(b)(2)(iii)(B) of this section. 

(iv) Because B’s net section 751 unrealized 

loss immediately after the distribution ($25) 

exceeds B’s net section 751 unrealized loss 

immediately before the distribution ($0), the 

distribution is a section 751(b) distribution. 

Under paragraph (b)(2)(i) of this section, B 

has a section 751(b) amount equal to $25, the 

difference of B’s share of pre-distribution net 

section 751 unrealized gain ($0) and B’s 

share of post-distribution net section 751 

unrealized loss ($25). Accordingly, paragraph 

(b)(3)(i) of this section requires B to account 

for $25 of ordinary income using a reasonable 

approach consistent with the purpose of this 

section. 

(v) Assume AB adopts an approach under 

which, immediately before the section 751(b) 

distribution, B is deemed to— 

(A) Receive a distribution of Unrealized 

Receivable with a fair market value of $25 

and a tax basis of $25 (which consists of B’s 

section 743(b) basis adjustment and is 

determined solely for purposes of applying a 

reasonable method consistent with the 

purposes of section 751(b)); 

(B) Sell Unrealized Receivable to AB in 

exchange for $25, so that B recognizes $0 of 

ordinary income, and AB receives Unrealized 

Receivable with a basis of $25; and 

(C) Contribute the $25 to AB. Provided the 

partnership applies the approach 

consistently for all section 751(b) 

distributions, AB’s adopted approach is 

reasonable. After taking into account the tax 

consequences of the section 751(b) 

distribution, AB’s modified balance sheet is 

as follows: 

Tax Book Capital Tax Book 

A 0 25 

Real Property ............................................................................................. 50 100 B 50 75 

Totals .................................................................................................. 50 100 50 100 

(vi) After determining the tax 

consequences of the section 751(b) 

distribution, the rules of sections 731 through 

736 apply. Accordingly, A recognizes no gain 

on the distribution of Unrealized Receivable, 

which A takes with a basis of $25. 

Example 5. Capital Gain Recognition 

Required. (i) A, B, and C are each 1/3 

partners in a partnership, ABC, that holds 

Unrealized Receivable 1 with a fair market 

value of $90, Unrealized Receivable 2 with a 

fair market value of $30, and nondepreciable 

real property with a fair market value of 

$180. The partnership has a section 754 

election in effect. Each of the partners has an 

adjusted basis in its partnership interest of $0 

with a fair market value of $100. None of the 

partners has a capital loss carryforward. ABC 

distributes to A Unrealized Receivable 1 in 

a current distribution. To determine if the 

distribution is a distribution to which section 

751(b) applies, ABC must apply the test set 

forth in paragraph (b)(2) of this section. 

(ii)(A) Pursuant to paragraph (b)(2)(iv) of 

this section, ABC revalues its assets and its 

partners’ capital accounts are increased 

under § 1.704–1(b)(2)(iv)(f) to reflect each 

partner’s share of the unrealized gain in the 

partnership’s assets. Before the distribution, 

ABC’s balance sheet is as follows: 

Tax Book Capital Tax Book 

Unrealized Receivable 1 ............................................................................ $0 $90 A $0 $100 

Unrealized Receivable 2 ............................................................................ 0 30 B 0 100 

Real Property ............................................................................................. 0 180 C 0 100 

Totals .................................................................................................. 0 300 0 300 

(B) If ABC disposed of all of its assets for 

cash in an amount equal to the fair market 

value of such property immediately before 

the distribution, A, B, and C would each be 

allocated $40 of net income from ABC’s 

section 751 property ($30 each from 

Unrealized Receivable 1 and $10 each from 

Unrealized Receivable 2). Accordingly, A, B, 

and C’s net section 751 unrealized gain 

immediately before the distribution is $40 

each under paragraph (b)(2)(ii) of this 

section. 

(iii)(A) After the distribution (but before 

taking into account any consequences under 

this section), ABC’s balance sheet would be 

as follows: 

Tax Book Capital Tax Book 

Unrealized Receivable 2 ............................................................................ $0 $30 A 

B 

$0 

0 

$10 

100 

Real Property ............................................................................................. 0 180 C 0 100 

Totals .................................................................................................. 0 210 0 210 

(B) If ABC disposed of all of its assets in 

exchange for cash in amounts equal to the 

fair market values of those assets 

immediately after the distribution, A, B, and 

C would each be allocated $10 of net income 

from ABC’s section 751 property ($10 each 

from Unrealized Receivable 2). If 

immediately after the distribution, A 

disposed of Unrealized Receivable 1 in 

exchange for $90 cash, A would recognize 

$90 of net income from section 751 property. 

Accordingly, B and C’s net section 751 

unrealized gain immediately after the 

distribution is $10 each under paragraph 

(b)(2)(iii)(A) of this section, and A’s is $100 

under paragraphs (b)(2)(iii)(A) and (B) of this 

section. 

(iv) Because B and C’s net section 751 

unrealized gain is greater immediately before 

the distribution than immediately after the 

distribution, the distribution is a section 

751(b) distribution. Under paragraph (b)(2)(i) 

of this section, each of B and C has a section 

751(b) amount equal to $30, the amount by 

which each partner’s share of predistribution net section 751 unrealized gain 

($40) exceeds its share of post-distribution 

net section 751 unrealized gain ($10). 

Accordingly, paragraph (b)(3)(i) of this 

section requires each of B and C to recognize 


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$30 of ordinary income using a reasonable 

approach consistent with the purpose of this 

section. ABC considers three approaches, the 

first of which is described in paragraphs (v) 

and (vi) of this example, the second of which 

is described in paragraphs (vii) and (viii) of 

this example, and the third of which is 

described in paragraph (ix) of this example. 

(v) Assume ABC adopts an approach under 

which, immediately before the section 751(b) 

distribution, B and C are each deemed to 

recognize $30 of ordinary income. To reflect 

B and C’s recognition of $30 of ordinary 

income, B and C increase their bases in their 

ABC partnership interests by $30 each, and 

the partnership increases its basis in 

Unrealized Receivable 1 by $60 immediately 

before the distribution to A. Following the 

distribution to A, A’s basis in Unrealized 

Receivable 1 is $0 under section 732(a)(2). 

Because ABC has elected under section 754, 

the distribution of Unrealized Receivable 1 to 

A would result in a $60 section 734(b) 

adjustment to Unrealized Receivable 2. See 

§ 1.755–1(c)(1). Because that basis adjustment 

would have altered the amount of net section 

751 unrealized gain or loss computed under 

paragraph (b)(2) of this section, A must 

recognize $60 of capital gain prior to the 

distribution of Unrealized Receivable 1 

pursuant to paragraph (b)(3)(ii)(A) of this 

section. This gain recognition increases A’s 

basis in its ABC partnership interest by $60 

immediately before the distribution to A, 

eliminating the section 734(b) adjustment. 

See section 732(a)(2). In addition, the 

partnership increases its basis in Real 

Property by $60 pursuant to paragraph 

(b)(3)(iii) of this section, and treats A’s gain 

recognized as reducing A’s $60 reverse 

section 704(c) amount in the Real Property. 

Provided the partnership applies the 

approach consistently for all section 751(b) 

distributions, ABC’s adopted approach is 

reasonable. After taking into account the tax 

consequences of the deemed gain approach 

described in this example, ABC’s modified 

balance sheet immediately prior to the 

distribution is as follows: 

Tax Book Capital Tax Book 

Unrealized Receivable 1 ............................................................................ $60 $90 A $60 $100 

Unrealized Receivable 2 ............................................................................ 0 30 B 30 100 

Real Property ............................................................................................. 60 180 C 30 100 

Totals .................................................................................................. 120 300 120 300 

(vi) After determining the tax 

consequences of the section 751(b) 

distribution, the rules of sections 731 through 

736 apply. Thus, Unrealized Receivable 1 

would take a $60 basis in A’s hands under 

section 732(a), and no section 734(b) 

adjustment would be made to Unrealized 

Receivable 2. After the distribution, ABC’s 

balance sheet is as follows: 

Tax Book Capital Tax Book 

Unrealized Receivable 2 ............................................................................ $0 $30 A 

B 

$0 

30 

$10 

100 

Real Property ............................................................................................. 60 180 C 30 100 

Totals .................................................................................................. 60 210 60 210 

(vii) Assume alternatively that ABC adopts 

an approach under which, immediately 

before the section 751(b) distribution, B and 

C are each deemed to: 

(A) Receive a distribution of Unrealized 

Receivable 1 with a fair market value of $30 

and tax basis of $0; 

(B) Sell the unrealized receivable to ABC 

for $30, recognizing $30 of ordinary income; 

and 

(C) Contribute the $30 to ABC. For the 

same reasons stated in paragraph (v) of this 

example, A recognizes capital gain of $60. To 

accomplish this, A, immediately before the 

section 751(b) distribution, is deemed to: 

(1) Receive a distribution of Real Property 

with a fair market value of $60 and tax basis 

of $0; 

(2) Sell the Real Property to ABC for $60, 

recognizing $60 of capital gain; and 

(3) Contribute the $60 to ABC. 

(viii) The partnership treats the $60 of gain 

recognized by A as reducing A’s $60 reverse 

section 704(c) amount in the Real Property. 

Provided the partnership applies the 

approach consistently for all section 751(b) 

distributions, ABC’s adopted approach is 

reasonable. Before taking into account the tax 

consequences of the section 751(b) 

distribution, ABC’s balance sheet is the same 

as the balance sheet shown in paragraph (v) 

of this example. After determining the tax 

consequences of the section 751(b) 

distribution, the rules of sections 731 through 

736 apply. The tax consequences under the 

rules of sections 731 through 736 are the 

same tax consequences described in 

paragraph (vi) of this example. 

(ix) Assume alternatively that A does not 

recognize capital gain of $60. As a result, 

upon the distribution of Unrealized 

Receivable 1 to A, ABC makes a $60 section 

734(b) adjustment to Unrealized Receivable 

2. The adopted approach is not reasonable 

because it is contrary to paragraph 

(b)(3)(ii)(A) of this section. 

Example 6. Capital Gain Recognition 

Required. (i)(A) Assume the same facts as 

Example 5 of this paragraph (g), except that 

Unrealized Receivable 1 has a $9 tax basis, 

and each of the partners has an adjusted basis 

in its partnership interest of $3. Before the 

distribution, ABC’s balance sheet is as 

follows: 

% Tax Book Capital Tax Book 

Unrealized Receivable 1 ............................................................................ $9 $90 A $3 $100 

Unrealized Receivable 2 ............................................................................ 0 30 B 3 100 

Real Property ............................................................................................. 0 180 C 3 100 

.................................................................................................................... .................... .................... .................... ....................

Totals .................................................................................................. 9 300 9 300 

(B) If ABC disposed of all of its assets for 

cash in an amount equal to the fair market 

value of such property immediately before 

the distribution, A, B, and C would each be 

allocated $37 of net income from ABC’s 

section 751 property ($27 each from 

Unrealized Receivable 1 and $10 each from 

Unrealized Receivable 2). Accordingly, A, B, 

and C’s net section 751 unrealized gain 

immediately before the distribution is $37 

each under paragraph (b)(2)(ii) of this 

section. 

(ii)(A) After the distribution (but before 

taking into account any consequences under 

this section), ABC’s balance sheet would be 

as follows: 


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Tax Book Capital Tax Book 

Unrealized Receivable 2 ............................................................................ $6 $30 A 

B 

$0 

3 

$10 

100 

Real Property ............................................................................................. 0 180 C 3 100 

Totals .................................................................................................. 6 210 6 210 

(B) If ABC disposed of all of its assets for 

cash in an amount equal to the fair market 

value of such property immediately after the 

distribution, taking into account the $6 

section 734(b) adjustment allocated to 

Unrealized Receivable 2, A, B, and C would 

each be allocated $8 of net income from 

ABC’s section 751 property ($8 each from 

Unrealized Receivable 2). If, immediately 

after the distribution, A disposed of 

Unrealized Receivable 1 for cash in an 

amount equal to its fair market value, A 

would recognize $87 of net income from 

section 751 property. Accordingly, B and C’s 

net section 751 unrealized gain immediately 

after the distribution is $8 each under 

paragraph (b)(2)(iii)(A) of this section, and 

A’s is $95 under paragraphs (b)(2)(iii)(A) and 

(B) of this section. 

(iii) Because B and C’s net section 751 

unrealized gain is greater immediately before 

the distribution than immediately after the 

distribution, the distribution is a section 

751(b) distribution. Under paragraph (b)(2)(i) 

of this section, each of B and C has a section 

751(b) amount equal to $29, the amount by 

which each partner’s share of predistribution net section 751 unrealized gain 

($37) exceeds its share of post-distribution 

net section 751 unrealized gain ($8). 

Accordingly, paragraph (b)(3)(i) of this 

section requires each of B and C to recognize 

$29 of ordinary income using a reasonable 

approach consistent with the purpose of this 

section. ABC considers two approaches, the 

first of which is described in paragraphs (iv) 

and (v) of this example, and the second of 

which is described in paragraphs (vi) and 

(vii) of this example. 

(iv) Assume ABC adopts an approach 

under which, immediately before the section 

751(b) distribution, B and C are each deemed 

to recognize $29 of ordinary income. To 

reflect B and C’s recognition of $29 of 

ordinary income, B and C increase their bases 

in their ABC partnership interests by $29 

each, and the partnership increases its basis 

in Unrealized Receivable 1 by $58 to $67 

immediately before the distribution to A. 

Following the distribution to A, A’s basis in 

Unrealized Receivable 1 is $3 under section 

732(a)(2). Because ABC has elected under 

section 754, the distribution of Unrealized 

Receivable 1 to A would result in a $64 

section 734(b) adjustment to Unrealized 

Receivable 2 (rather than the $6 section 

734(b) adjustment computed prior to the 

application of this section). See § 1.755– 

1(c)(1). Because that additional basis 

adjustment would have altered the amount of 

net section 751 unrealized gain or loss 

computed under paragraph (b)(2) of this 

section, A must recognize $58 of capital gain 

prior to the distribution of Unrealized 

Receivable 1 pursuant to paragraph 

(b)(3)(ii)(A) of this section. This gain 

recognition increases A’s basis in its ABC 

partnership interest by $58 to $61 

immediately before the distribution to A. In 

addition, the partnership increases its basis 

in Real Property by $58 pursuant to 

paragraph (b)(3)(iii) of this section, and treats 

A’s gain recognized as reducing A’s $60 

reverse section 704(c) amount in the Real 

Property. Provided the partnership applies 

the approach consistently for all section 

751(b) distributions, ABC’s adopted approach 

is reasonable. After taking into account the 

tax consequences of the deemed gain 

approach described in this example, ABC’s 

modified balance sheet immediately prior to 

the distribution is as follows: 

Tax Book Capital Tax Book 

Unrealized Receivable 1 ............................................................................ $67 $90 A $61 $100 

Unrealized Receivable 2 ............................................................................ 0 30 B 32 100 

Real Property ............................................................................................. 58 180 C 32 100 

Totals .................................................................................................. 125 300 125 300 

(v) After determining the tax consequences 

of the section 751(b) distribution, the rules of 

sections 731 through 736 apply. Thus, A 

would take a $61 tax basis in Unrealized 

Receivable 1 under section 732(a), and a $6 

section 734(b) adjustment would be made to 

Unrealized Receivable 2. After the 

distribution, ABC’s balance sheet is as 

follows: 

Tax Book Capital Tax Book 

Unrealized Receivable 2 ............................................................................ $6 $30 A 

B 

$0 

32 

$10 

100 

Real Property ............................................................................................. 58 180 C 32 100 

Totals .................................................................................................. 64 210 64 210 

(vi) Assume alternatively that ABC adopts 

an approach under which, immediately 

before the section 751(b) distribution, B and 

C are each deemed to: 

(A) Receive a distribution of Unrealized 

Receivable 1 with a fair market value of $29 

and tax basis of $0; 

(B) Sell the unrealized receivable to ABC 

for $29, recognizing $29 of ordinary income; 

and 

(C) Contribute the $29 to ABC. For the 

same reasons stated in paragraph (iv) of this 

example, A recognizes capital gain of $58. To 

accomplish this, A, immediately before the 

section 751(b) distribution, is deemed to: 

(1) Receive a distribution of Real Property 

with a fair market value of $58 and tax basis 

of $0; 

(2) Sell the Real Property to ABC for $58, 

recognizing $58 of capital gain; and 

(3) Contribute the $58 to ABC. 

(vii) The partnership treats the $58 of gain 

recognized by A as reducing A’s $60 reverse 

section 704(c) amount in the Real Property. 

Provided the partnership applies the 

approach consistently for all section 751(b) 

distributions, ABC’s adopted approach is 

reasonable. After taking into account the tax 

consequences of the section 751(b) 

distribution, ABC’s balance sheet is the same 

as the balance sheet shown in paragraph (iv) 

of this example. After determining the tax 

consequences of the section 751(b) 

distribution, the rules of sections 731 through 

736 apply. The tax consequences under the 

rules of sections 731 through 736 are the 

same tax consequences described in 

paragraph (v) of this example. 

Example 7. Capital Gain Recognition 

Elective. (i)(A) Assume the same facts as 

described in Example 6 of this paragraph (g), 


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including that ABC adopts the deemed gain 

approach described in paragraph (iv), except 

that ABC does not have a section 754 election 

in effect. As in Example 6, each of A, B, and 

C has net section 751 unrealized gain of $37 

immediately before the distribution. After the 

distribution (but before taking into account 

any consequences under this section), ABC’s 

balance sheet would be as follows: 

Tax Book Capital Tax Book 

Unrealized Receivable 2 ............................................................................ $0 $30 A 

B 

0 

3 

10 

100 

Real Property ............................................................................................. 0 180 C 3 100 

Totals .................................................................................................. 0 210 6 210 

(B) If ABC disposed of all of its assets for 

cash in an amount equal to the fair market 

value of such property immediately after the 

distribution, because there is no section 

734(b) adjustment allocated to Unrealized 

Receivable 2, A, B, and C would each be 

allocated $10 of net income from ABC’s 

section 751 property ($10 each from 

Unrealized Receivable 2). If, immediately 

after the distribution, A disposed of 

Unrealized Receivable 1 for cash in an 

amount equal to its fair market value, A 

would recognize $87 of net income from 

section 751 property. Accordingly, B and C’s 

net section 751 unrealized gain immediately 

after the distribution is $10 each under 

paragraph (b)(2)(iii)(A) of this section, and 

A’s is $97 under paragraphs (b)(2)(iii)(A) and 

(B) of this section. 

(ii) Because B and C’s net section 751 

unrealized gain is greater immediately before 

the distribution than immediately after the 

distribution, the distribution is a section 

751(b) distribution. Under paragraph (b)(2)(i) 

of this section B and C each have a section 

751(b) amount equal to $27, the amount by 

which those partners’ shares of predistribution net section 751 unrealized gain 

($37), exceeds their shares of postdistribution net section 751 unrealized gain 

($10). Accordingly, paragraph (b)(3)(i) of this 

section requires each of B and C to recognize 

$27 of ordinary income using a reasonable 

approach consistent with the purpose of this 

section. 

(iii) Assume ABC adopts an approach 

under which, immediately before the section 

751(b) distribution, B and C are each deemed 

to recognize $27 of ordinary income. To 

reflect B and C’s recognition of $27 of 

ordinary income, B and C increase their bases 

in their ABC partnership interests by $27, 

and the partnership increases its basis in 

Unrealized Receivable 1 by $54 to $63 

immediately before the distribution to A. The 

distribution to A results in an adjustment to 

the basis of the distributed Unrealized 

Receivable 1 under section 732(a)(2), 

reducing the basis of Unrealized Receivable 

1 in the hands of A to $3. Because ABC has 

not elected under section 754 and does not 

have a substantial basis reduction under 

section 734(d), this $60 decrease to the basis 

of Unrealized Receivable 1 will not affect the 

basis of other assets held by ABC. Thus, the 

distribution does not alter the amount of net 

section 751 unrealized gain or loss computed 

under paragraph (b)(2) of this section. 

Accordingly, A is not obligated under 

paragraph (b)(3)(ii)(A) of this section to 

recognize gain or income upon the 

distribution of Unrealized Receivable 1. 

However, A may elect to recognize $60 of 

capital gain under paragraph (b)(3)(ii)(B) of 

this section to eliminate the section 732 basis 

adjustment to the distributed Unrealized 

Receivable 1 which would otherwise cause 

A’s net section 751 unrealized gain to be 

greater immediately after the distribution 

than it was immediately before the 

distribution. This gain recognition increases 

A’s basis in its ABC partnership interest by 

$60 immediately before the distribution to A. 

In addition, the partnership increases its 

basis in Real Property by $60 pursuant to 

paragraph (b)(3)(iii) of this section, and treats 

A’s gain recognized as reducing A’s $60 

reverse section 704(c) amount in the Real 

Property. A receives the distributed 

Unrealized Receivable 1 with a basis of $63, 

so that the distribution does not increase A’s 

net section 751 unrealized gain. After the 

distribution, ABC’s balance sheet is as 

follows: 

Tax Book Capital Tax Book 

Unrealized Receivable 2 ............................................................................ $0 $30 A 

B 

0 

30 

10 

100 

Real Property ............................................................................................. 60 180 C 30 100 

Totals .................................................................................................. 60 210 60 210 

Example 8. (i) A, B, and C, each domestic 

corporations, are 1/3 partners in a domestic 

partnership ABC. ABC purchased 100% of 

the stock in two foreign corporations, X and 

Y. X and Y each have one share of stock 

outstanding. ABC has a basis of $15 in its X 

share with a fair market value of $150, and 

a basis of $3 in its Y share with a fair market 

value of $30. The earnings and profits of X 

that are attributable to ABC’s X stock under 

section 1248 are $135; the earnings and 

profits of Y that are attributable to ABC’s Y 

stock are $27. ABC has a section 754 election 

in effect. Each of A, B, and C has a 

partnership interest with an adjusted basis of 

$6 and a fair market value of $60. On January 

1, 2013, ABC distributes the Y share to A in 

a current distribution. To determine if the 

distribution is a distribution to which section 

751(b) applies, ABC must apply the test set 

forth in paragraph (b)(2) of this section. 

(ii)(A) Pursuant to paragraph (b)(2)(iv) of 

this section, ABC revalues its assets. Its 

partners’ capital accounts are increased 

under § 1.704–1(b)(2)(iv)(f) to reflect each 

partner’s share of the unrealized gain in the 

partnership’s assets. Before the distribution, 

ABC’s balance sheet is as follows (with the 

shares of X and Y each reflected as having 

both an unrealized receivable component and 

a capital gain component): 

Tax Book Capital Tax Book 

X stock (total) ............................................................................................. $15 $150 A $6 $60 

Unrealized receivable ................................................................................ 0 135 B 6 60 

Capital gain asset ...................................................................................... 15 15 C 6 60 

Y stock (total) ............................................................................................. 3 30 .................... ....................

Unrealized receivable ................................................................................ 0 27 .................... ....................

Capital gain asset ...................................................................................... 3 3 .................... ....................

Totals .................................................................................................. 18 180 18 180 


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(B) If ABC disposed of all of its assets for 

cash in an amount equal to the assets’ fair 

market value immediately before the 

distribution, A, B, and C would each be 

allocated $54 of net income from ABC’s 

section 751 property ($45 each from X stock 

and $9 each from Y stock). Accordingly, A, 

B, and C’s net section 751 unrealized gain 

immediately before the distribution is $54 

each under paragraph (b)(2)(ii) of this 

section. 

(iii)(A) After the distribution (but before 

taking into account any consequences under 

this section), ABC’s balance sheet is as 

follows: 

Tax Book Capital Tax Book 

X stock (total) ............................................................................................. $15 $150 A $3 $30 

Unrealized receivable ................................................................................ 0 135 B 6 60 

Capital gain asset ...................................................................................... 15 15 C 6 60 

Totals .................................................................................................. 15 150 15 150 

(B) If ABC disposed of its asset for cash in 

an amount equal to the fair market value of 

that asset immediately after the distribution, 

A, B, and C would each be allocated $45 of 

net income from ABC’s section 751 property 

pursuant to § 1.704–3(a)(6). A, however, 

received Y stock, which continues to be 

section 751 property in A’s hands under 

section 735(a), with a holding period that 

includes the partnership’s holding period 

under section 735(b). If A disposed of its Y 

stock for cash in an amount equal to its fair 

market value, A would recognize $27 of gain 

under section 751(b) on the Y stock (a foreign 

corporation described in section 1248) that is 

included in A’s income under section 1248 

as a dividend to the extent of the attributable 

earnings. Accordingly, B and C’s net section 

751 unrealized gain immediately after the 

distribution is $45 each under paragraph 

(b)(2)(iii)(A) of this section, and A’s is $72 

under paragraphs (b)(2)(iii)(A) and (B) of this 

section. 

(iv) Because B and C’s net section 751 

unrealized gain is greater immediately before 

the distribution than immediately after the 

distribution, the distribution is a section 

751(b) distribution. Under paragraph (b)(2)(i) 

of this section, B and C each have a section 

751(b) amount equal to $9, the amount by 

which those partners shares of predistribution net section 751 unrealized gain 

($54) exceeds their shares of post-distribution 

net section 751 unrealized gain ($45). 

Accordingly, paragraph (b)(3)(i) of this 

section requires each of B and C to recognize 

$9 as a dividend under section 1248 using a 

reasonable approach consistent with the 

purpose of this section. ABC considers two 

approaches, the first of which is described in 

paragraphs (v) and (vi) of this example, and 

the second of which is described in 

paragraph (vii) of this example. 

(v) Assume ABC adopts an approach under 

which, immediately before the section 751(b) 

distribution, B and C are each deemed to 

recognize $9 of gain includible as a dividend 

with respect to the distribution of the Y 

stock, which is treated as a sale or exchange 

for purposes of section 1248. To reflect B and 

C’s recognition of $9 of dividend income, B 

and C increase the bases in their ABC 

partnership interests by $9 each, and the 

partnership increases its basis in the Y share 

unrealized receivable component by $18 

immediately before the distribution. The 

portion of the unrealized receivable 

component of the Y share that is deemed to 

be sold or exchanged under section 1248 has 

a new holding period beginning on the day 

after the section 751(b) distribution (‘‘the 

new holding period portion’’). The earnings 

and profits of $18 attributable to the new 

holding period portion of the Y share are 2/ 

3 of the total earnings and profits attributable 

to the Y share immediately before the 

distribution (B and C’s $18 aggregate gain 

recognized under section 751(b) divided by 

$27, the aggregate of all the partners’ net 

section 751 unrealized gain immediately 

before the distribution). The remaining 

earnings and profits are allocated to the 

remainder of the Y share. Provided the 

partnership applies the approach 

consistently for all section 751(b) 

distributions, ABC’s adopted approach is 

reasonable. After taking into account the tax 

consequences of the deemed gain approach 

described in this example, ABC’s modified 

balance sheet immediately before the 

distribution is as follows: 

Tax Book Capital Tax Book 

X stock ....................................................................................................... $15 $150 A $6 $60

Unrealized receivable ................................................................................ 0 135 B 15 60 

Capital gain asset ...................................................................................... 15 15 C 15 60 

Y stock ....................................................................................................... 21 30 .................... ....................

New holding period portion ........................................................................ 18 18 .................... ....................

Unrealized receivable ................................................................................ 0 9 .................... ....................

Capital gain asset ...................................................................................... 3 3 .................... ....................

Totals .................................................................................................. 36 180 36 180 

(vi) After determining the tax 

consequences of the section 751(b) 

distribution, the rules of sections 731 through 

736 apply. Accordingly, the basis of the 

distributed Y stock in A’s hands is limited 

under section 732(a)(2) to A’s $6 basis in its 

partnership interest. Pursuant to section 

732(c)(3)(B), the $15 decrease in basis from 

$21 to $6 must be allocated to the distributed 

components of the Y stock in proportion to 

their respective adjusted bases. A must 

allocate the $15 decrease in basis in the Y 

stock between the new holding period 

portion (which has a basis of $18) and the 

remainder of the Y share (which has a basis 

of $3). Accordingly, A receives the new 

holding period portion of the Y share with 

an adjusted basis of $5.14 ($6 multiplied by 

($18 divided by $21)), and the remainder of 

the Y share with an adjusted basis of $0.86 

($6 multiplied by ($3 divided by $21)). 

Because the basis of the distributed Y stock 

in A’s hands was reduced from $21 (the basis 

of the Y stock in the hands of ABC) to $6 (the 

basis in A’s hands), ABC must increase the 

basis of its remaining asset under section 

734(b)(1)(B) by $15. ABC must allocate the 

$15 under § 1.755–1(c)(1)(i) to the capital 

gain portion of the X stock. After the 

distribution, ABC’s balance sheet is as 

follows: 

Tax Book Capital Tax Book 

X stock ....................................................................................................... $30 $150 A $0 $30

Unrealized receivable ................................................................................ 0 135 B 15 60 

Capital gain asset ...................................................................................... 30 15 C 15 60 


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Tax Book Capital Tax Book 

Totals .................................................................................................. 30 150 30 150 

(vii) Assume alternatively that ABC adopts 

an approach under which, immediately 

before the section 751(b) distribution, B and 

C are each deemed to: 

(A) Receive a distribution of the portion of 

the partnership’s Y stock with a fair market 

value of $9 and a tax basis of $0; 

(B) Sell the Y stock back to ABC for $9, 

recognizing $9 of gain includible as a 

dividend; and 

(C) Contribute the $9 to ABC. ABC will be 

deemed to have purchased for $18 a portion 

of the Y stock unrealized receivable 

component, which will have a new holding 

period. The deemed sale of Y stock by B and 

C to ABC will be treated as a sale or exchange 

for purposes of section 1248. Provided that 

the partnership applies the approach 

consistently for all section 751(b) 

distributions, Partnership ABC’s adopted 

approach is reasonable. After taking into 

account the tax consequences of the deemed 

transaction, ABC’s balance sheet is the same 

as the balance sheet shown in paragraph (v) 

of this example. After taking into account the 

tax consequences of the section 751(b) 

distribution, ABC’s balance sheet is the same 

as the balance sheet shown in paragraph (vi) 

of this example. 

(viii) Assume that in a later unrelated 

transaction, A sells its Y stock at a time when 

its fair market value, earnings and profits, 

and adjusted basis have not changed. The 

sale of Y stock by A is a sale or exchange 

subject to section 1248. Pursuant to § 1.732– 

1(c)(2)(v), in determining the dividend 

portion of its gain on the Y stock under 

section 1248, A does not take into account 

the $15 decrease in basis under section 732. 

Accordingly, upon the sale of the Y stock, A 

recognizes $9 of gain, the lesser of $9 ($0 gain 

on the new holding period portion ($18 fair 

market value minus $18 basis) plus $9 gain 

on the remainder ($12 fair market value 

minus $3 basis)) or $9 (earnings and profits 

attributable to the remainder of the Y share) 

as dividend income under section 1248. A 

recognizes $15 of capital gain in addition to 

the $9 of dividend income ($30 amount 

realized minus $15 ($6 aggregate basis in Y 

share plus $9 section 1248 dividend 

income)). 

(ix) Assume that ABC also sells its X stock 

in a later unrelated transaction at a time 

when its fair market value has declined to 

$120 but earnings and profits have remained 

the same. ABC has not made an election 

under § 1.755–1(c)(2)(vi). In determining the 

dividend portion of its gain on the X stock 

under section 1248, ABC does not take into 

account the $15 increase in basis under 

section 734(b). Upon the sale of the stock, 

ABC recognizes $105, the lesser of $105 

($120–$15) or $135 (earnings and profits 

attributable to the X stock for the 

partnership’s holding period) as dividend 

income. In addition to the $105 of gain 

includible as a dividend, ABC recognizes $15 

of capital loss ($120 amount realized minus 

$135 ($30 aggregate basis in X stock plus 

$105 section 1248 dividend income)). 

Example 9. (i) Assume the same facts as 

in Example 8 of this paragraph (g), except 

assume that Partnership ABC makes an 

election under § 1.755–1(c)(2)(vi). As in 

Example 8, paragraph (b)(3)(i) of this section 

requires each of B and C to recognize $9 as 

a dividend under section 1248 using a 

reasonable approach consistent with the 

purpose of this section for the reasons 

described in paragraphs (ii) through (iv) of 

Example 8. Further assume that ABC adopts 

the deemed gain approach described in 

paragraph (v) of Example 8. As in Example 

8, B and C are each deemed to recognize $9 

of dividend income with respect to the 

distribution of the Y stock, which is treated 

as a sale or exchange for purposes of section 

1248. To reflect B and C’s recognition of $9 

of dividend income, B and C increase the 

bases in their ABC partnership interests by 

$9 each. The partnership increases its basis 

in the Y share unrealized receivable 

component by $18 immediately before the 

distribution. The portion of the unrealized 

receivable component of the Y share that is 

deemed to be sold or exchanged under 

section 1248 has a new holding period 

beginning on the day after the section 751(b) 

distribution (‘‘the new holding period 

portion’’). 

(ii) Because ABC makes an election under 

§ 1.755–1(c)(2)(vi), the distribution of the Y 

share to A results in a $15 section 734(b) 

adjustment to the unrealized receivable 

component of the X share. Because that basis 

adjustment would have altered the amount of 

net section 751 unrealized gain or loss 

computed under paragraph (b)(2) of this 

section, A must recognize $15 of gain with 

respect to the X share pursuant to paragraph 

(b)(3)(ii)(A) of this section. Also pursuant to 

paragraph (b)(3)(ii)(A) of this section, A’s 

recognition of income with respect to the X 

stock is a sale or exchange for purposes of 

section 1248 and begins a new holding 

period for this portion of ABC’s X stock, 

including for purposes of attributing earnings 

and profits. This income recognition 

increases A’s basis in its ABC partnership 

interest by $15 immediately before the 

distribution to A. In addition, the partnership 

increases its basis in the X share by $15, 

immediately before the distribution to A. The 

partnership treats the $15 of dividend 

income recognized by A as reducing A’s $15 

reverse section 704(c) amount in the X stock. 

Provided the partnership applies the 

approach consistently for all section 751(b) 

distributions, ABC’s adopted approach is 

reasonable. After taking into account the tax 

consequences of the deemed gain approach 

described above, ABC’s balance sheet is as 

follows: 

Tax Book Capital Tax Book 

X stock ....................................................................................................... $30 $150 A $21 $60 

Unrealized receivable ................................................................................ 0 120 B 15 60 

Capital gain asset ...................................................................................... 30 30 C 15 60 

Y stock ....................................................................................................... 21 30 .................... ....................

Unrealized receivable ................................................................................ 0 9 .................... ....................

Capital gain asset ...................................................................................... 21 21 .................... ....................

Totals .................................................................................................. 51 180 51 180 

(iii)(A) After determining the tax 

consequences of the section 751(b) 

distribution, the rules of sections 731 through 

736 apply. Accordingly, the Y stock would 

take a $21 basis in A’s hands under section 

732(a), and no section 734(b) adjustment 

would be made to the X stock. After the 

distribution, ABC’s balance sheet is as 

follows: 

Tax Book Capital Tax Book 

X stock ....................................................................................................... $30 $150 A $0 $30

Unrealized receivable ................................................................................ 0 120 B 15 60 

Capital gain asset ...................................................................................... 30 30 C 15 60 

Totals .................................................................................................. 30 150 30 150 


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(B) If the partnership sells the X stock, the 

gain recognized is $120 ($150—$30), all of 

which is recharacterized as a dividend under 

section 1248. Because A’s recognition of $15 

of dividend income reduced A’s reverse 

section 704(c) amount in the X stock, this 

gain is allocated $45 to B, $45 to C, and $30 

to A. 

■ Par. 8. Section 1.755–1 is amended 

by: 

■ a. Adding paragraphs (c)(2)(iii), (iv), 

(v), and (vi). 

■ b. Revising the paragraph heading and 

the introductory text of paragraph (c)(6). 

■ c. Removing the paragraph heading 

‘‘Example.’’ in paragraph (c)(6) and 

adding ‘‘Example 1.’’ in its place. 

■ d. Adding Examples 2 and 3 to 

paragraph (c)(6). 

■ e. Revising paragraph (e)(2). 

The additions and revisions read as 

follows: 

§ 1.755–1 Rules for allocation of basis. 

* * * * * 

(c) * * * 

(2) * * * 

(iii) Coordination with section 1245 

and similar provisions. Any increase in 

basis allocated to capital gain property 

pursuant to the second sentence in 

paragraph (c)(2)(i) of this section is not 

taken into account in determining the 

recomputed or adjusted basis in the 

property for purposes of section 

1245(a)(1). Notwithstanding the prior 

sentence, any depreciation or 

amortization of the increase in basis that 

is allowed or allowable is taken into 

account in computing the property’s 

recomputed basis. In the case of 

property that is subject to section 

617(d)(1), 1250(a)(1), 1252(a)(1), or 

1254(a)(1), rules similar to the rule in 

this paragraph (c)(2)(iii) shall apply. 

(iv) Coordination with section 1231. 

Any increase in basis allocated to 

capital gain property pursuant to the 

second sentence in paragraph (c)(2)(i) of 

this section is not taken into account in 

determining section 1231 gain and loss, 

as defined in section 1231(a)(3). Any 

basis adjustment to an asset not taken 

into account pursuant to this paragraph 

(c)(2)(iv) shall be treated as gain from 

the sale or exchange of a capital asset 

with the same holding period as the 

underlying asset. 

(v) Coordination with sections 1248 

and 995. Any increase in basis allocated 

to stock in a foreign corporation 

pursuant to the second sentence in 

paragraph (c)(2)(i) of this section, or any 

decrease in basis allocated to stock in a 

foreign corporation pursuant to the 

second sentence in paragraph (c)(2)(ii) 

of this section, is not taken into account 

in determining the amount of gain 

recognized on the sale or exchange of 

such stock for purposes of section 

1248(a). In the case of property that is 

subject to section 995(c), rules similar to 

the rule set forth in this paragraph 

(c)(2)(v) shall apply. 

(vi) Election not to apply the 

provisions of paragraphs (c)(2)(iii), (iv), 

and (v). A partnership may elect not to 

apply paragraphs (c)(2)(iii), (iv), and (v) 

of this section, and § 1.732–1(c)(2)(iii), 

(iv), and (v). An election made under 

this paragraph (c)(2)(vi) shall apply to 

all property distributions taking place in 

the partnership taxable year for which 

the election is made and in all 

subsequent partnership taxable years 

(including after a termination of the 

partnership under section 708(b)(1)(B)). 

An election under this paragraph 

(c)(2)(vi) must be made in a written 

statement filed with the partnership 

return for the first taxable year in which 

any of paragraph (c)(2)(iii), (iv), or (v) of 

this section, or § 1.732–1(c)(2)(iii), (iv), 

and (v), would have applied if no 

election was made. An election under 

this paragraph (c)(2)(vi) is valid only if 

the required statement is included with 

a partnership return that is filed not 

later than the time prescribed by 

paragraph (e) of this section or 

§ 1.6031(a)–1 (including extensions 

thereof) for filing the return for such 

taxable year. This election is a method 

of accounting under section 446, and 

once the election is made, it can be 

revoked only with the consent of the 

Commissioner. The revocation of the 

election, or the making of a late election, 

under this paragraph (c)(2)(vi) is a 

change in method of accounting to 

which the provisions of section 446(e) 

and the regulations under section 446(e) 

apply. See paragraph (c)(6), Example 3, 

of this section for the treatment of a 

section 734(b) adjustment if an election 

under this paragraph (c)(2)(vi) is made, 

and certain consequences of the election 

under section 751(b). The statement 

required by this paragraph (c)(2)(vi) 

shall— 

(A) Set forth the name and address of 

the partnership making the election; 

(B) Be signed by any officer, manager, 

or member of the partnership who is 

authorized (under local law or the 

partnership’s organizational documents) 

to make the election and who represents 

to having such authorization under 

penalties of perjury; and 

(C) Contain a declaration that the 

partnership elects not to apply 

paragraphs (c)(2)(iii), (iv), and (v) of this 

section and § 1.732–1(c)(2)(iii), (iv), and 

(v). 

* * * * * 

(6) Examples. The following examples 

illustrate this paragraph (c): 

* * * * * 

Example 2. (i) A, B, and C are equal 

partners in ABC. Each partner has an outside 

basis in its partnership interest of $20. ABC 

owns depreciable equipment X with an 

adjusted basis of $30 and a fair market value 

of $150 and depreciable equipment Y with an 

adjusted basis of $30 and a fair market value 

of $30. ABC has made an election under 

section 754. 

(ii) The depreciable equipment X has $120 

of adjustments reflected in its adjusted basis 

within the meaning of § 1.1245–2(a)(2). 

Accordingly, the entire $120 of the gain with 

respect to depreciable equipment X would be 

treated as gain to which section 1245(a)(1) 

would apply if the partnership sold the 

depreciable equipment X for its fair market 

value. ABC, therefore, has a $120 unrealized 

receivable within the meaning of § 1.751– 

1(c)(4)(iii). Assume ABC makes a current 

distribution of the depreciable equipment Y 

to A. Because A’s basis in his partnership 

interest is only $20, A’s basis in the 

depreciable equipment Y will be limited to 

$20 under section 732(a). Under section 

734(b), ABC will increase the basis in its 

capital gain property by $10 and will not 

adjust the basis of ordinary income property. 

Assume ABC has not made an election under 

§ 1.755–1(c)(2)(vi). 

(iii) Allocation between classes. Pursuant 

to § 1.755–1(a)(1), ABC’s $120 unrealized 

receivable associated with the depreciable 

equipment X is treated as a separate asset 

that is ordinary income property. Thus, ABC 

is treated as having two assets (each actually 

a component of the single asset, equipment 

X) after the distribution, one that is capital 

gain property with a basis of $30 and a fair 

market value of $30, and one that is ordinary 

income property with a basis of $0 and a fair 

market value of $120. 

(iv) Allocation within class. ABC must 

allocate the $10 basis increase entirely to the 

capital gain portion of the depreciable 

equipment X, as it holds no other capital gain 

property after it distributes the depreciable 

equipment Y to A. Therefore, ABC increases 

the basis of the capital gain property to $40. 

(v) Treatment of section 734(b) adjustment. 

Pursuant to paragraph (c)(2)(iii) of this 

section, if ABC sold its depreciable 

equipment X for $150 immediately after the 

distribution to A, ABC would not take into 

account the $10 section 734(b) adjustment in 

determining ABC’s recomputed or adjusted 

basis in the depreciable equipment X for 

purposes of section 1245(a)(1) and, 

accordingly, would recognize $120 of 

ordinary income. Also pursuant to paragraph 

(c)(2)(iv) of this section, the $10 section 

734(b) adjustment is not taken into account 

for purposes of determining section 1231 

gain or loss. Thus, pursuant to paragraph 

(c)(2)(vi) of this section, ABC would 

recognize a $10 capital loss. 

(vi) Treatment of additional depreciation 

and appreciation. (A) Assume, instead, that 

ABC continues to own the equipment and 

takes additional depreciation deductions of 

$16 ($15 with respect to the original 

remaining $30 basis and $1 with respect to 

the additional $10 basis resulting from the 

section 734(b) adjustment). At a time when 

the equipment has appreciated in value to 

$170, ABC sells the depreciable equipment X 


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for $170 in a taxable transaction. In that same 

taxable year, ABC does not sell any other 

property used in its trade or business. 

(B) Pursuant to section 1245(a)(1), ABC 

must recognize ordinary income in an 

amount by which the lesser of the following 

two amounts exceeds ABC’s adjusted basis in 

the depreciable equipment X— 

(1) ABC’s recomputed basis in the 

depreciable equipment, or 

(2) ABC’s amount realized; 

(C) Pursuant to section 1245(a)(2)(A), 

ABC’s recomputed basis is an amount equal 

to the sum of— 

(1) ABC’s adjusted basis of the property, 

plus 

(2) The amount of adjustments reflected in 

the adjusted basis on account of deductions 

allowed or allowable. 

(D) Pursuant to (c)(2)(iii) of this section, the 

$9 remaining section 734(b) adjustments is 

not taken into account in determining ABC’s 

recomputed or adjusted basis in the property 

for purposes of section 1245(a)(1). Thus, 

ABC’s adjusted basis in the property is $15 

(the remaining original basis). Also pursuant 

to (c)(2)(iii) of this section, however, any 

depreciation, or amortization of the section 

734(b) adjustment that is allowed or 

allowable is taken into account in computing 

the property’s recomputed basis. Thus, ABC’s 

amount of adjustments reflected in the 

adjusted basis is $136 (the original $120 

adjustment for depreciation deductions plus 

the additional $15 adjustment for 

depreciation deductions plus the additional 

$1 adjustment for depreciation deductions 

taken with respect to the section 734(b) 

adjustment). Accordingly, ABC’s recomputed 

basis is $151 ($15 adjusted basis plus $136 

of adjustments), which is lower than ABC’s 

amount realized of $170. ABC, therefore, 

must recognize ordinary income in an 

amount by which ABC’s recomputed basis of 

$151 exceeds ABC’s adjusted basis in the 

depreciable equipment X. Pursuant to 

(c)(2)(iii) of this section, the $9 remaining 

section 734(b) adjustments is not taken into 

account in determining the adjusted basis in 

the property for purposes of section 

1245(a)(1). Accordingly, ABC must recognize 

$136 of ordinary income (the excess of ABC’s 

$151 recomputed basis in the depreciable 

equipment X over ABC’s $15 adjusted basis 

in the depreciable equipment X). 

(E) Pursuant to paragraph (c)(2)(iv) of this 

section, the section 734(b) adjustment is not 

taken into account in determining ABC’s 

section 1231 gain or loss. Accordingly, 

pursuant to section 1231(a)(1), ABC 

recognizes $19 of capital gain (ABC’s $170 

amount realized on the disposition of the 

depreciable equipment X over ABC’s 

adjusted basis of $15 in the depreciable 

equipment X, reduced by the $136 of 

ordinary income ABC recognized under 

section 1245(a)(1)). Pursuant to paragraph 

(c)(2)(vi) of this section, ABC also recognizes 

a capital loss equal to the remaining $9 

section 734(b) adjustment. 

Example 3. (i) Assume the same facts as 

Example 2 of this paragraph (c), except ABC 

has made an election under paragraph 

(c)(2)(vi) of this section. 

(ii) Treatment of section 734(b) adjustment. 

Because ABC has made an election under 

paragraph (c)(2)(vi) of this section, paragraph 

(c)(2)(iii) of this section does not apply. Thus, 

if ABC sold its depreciable equipment X 

immediately after the distribution to A, ABC 

would take into account the $10 section 

734(b) adjustment in determining ABC’s 

recomputed or adjusted basis in the 

depreciable equipment X for purposes of 

section 1245(a)(1) and, accordingly, would 

recognize $110 of ordinary income (including 

for purposes of applying section 751). 

* * * * * 

(e) * * * 

(2) Special rules. Paragraphs (a) and 

(b)(3)(iii) of this section apply to 

transfers of partnership interests and 

distributions of property from a 

partnership that occur on or after June 

9, 2003, and paragraphs (c)(2)(iii), (iv), 

(v), (vi), and (c)(6) of this section and 

Examples 2 and 3 of paragraph (c) of 

this section apply to distributions of 

property from a partnership that occur 

on or after the date of publication of a 

Treasury decision adopting these rules 

as final regulations in the Federal 

Register. 

Par. 9. Section 1.995–4 is amended by 

revising the section heading and adding 

a new sentence at the end of paragraph 

(a)(1) to read as follows: 

§ 1.995–4 Gain on certain dispositions of 

stock in a DISC. 

(a) * * * (1) * * * But see §§ 1.732– 

1(c)(2)(v) and 1.755–1(c)(2)(v) for rules 

governing the application of section 

995(c) to partnership property in 

situations in which the basis of the 

property is increased or decreased 

under section 732 or 734(b). 

* * * * * 

Par. 10. Section 1.1231–1 is amended 

by adding a new sentence after the third 

sentence in the introductory text of 

paragraph (d) to read as follows: 

§ 1.1231–1 Gains and losses from the sale 

or exchange of certain property used in the 

trade or business. 

* * * * * 

(d) * * * See also §§ 1.732–1(c)(2)(iv) 

and 1.755–1(c)(2)(iv) for rules governing 

the application of section 1231 to 

partnership property in situations in 

which the basis of the property is 

increased under section 732 or 734(b). 

* * * 

* * * * * 

§ 1.1245–2 [Amended] 

Par. 11. Section 1.1245–2 is amended 

by removing paragraph (c)(6)(ii) and 

redesignating paragraph (c)(6)(iii) as 

paragraph (c)(6)(ii). 

Par. 12. Section 1.1245–4 is amended 

by revising paragraphs (f)(2)(ii) and 

(f)(3) and Example 2 to read as follows: 

§ 1.1245–4 Exceptions and limitations. 

* * * * * 

(f) * * * 

(2) * * * 

(ii) The portion of such potential 

section 1245 income which is 

recognized as ordinary income under 

paragraphs (b)(3)(i) and (b)(4)(i) of 

§ 1.751–1. 

(3) * * * 

Example 2. Assume the same facts as in 

Example 1 of this paragraph (f) except that 

the machine had been purchased by the 

partnership. Assume further that upon the 

distribution, $4,000 of gain is recognized as 

ordinary income under section 751(b). Under 

section 1245(b)(3), gain to be taken into 

account under section 1245(a)(1) by the 

partnership is limited to $4,000. Immediately 

after the distribution, the amount of 

adjustments reflected in the adjusted basis of 

the property is $2,000 (that is, potential 

section 1245 income of the partnership, 

$6,000, minus gain recognized under section 

751(b), $4,000). Thus, if the adjusted basis of 

the machine in the hands of C were $10,000, 

the recomputed basis of the machine would 

be $12,000 ($10,000 plus $2,000). 

* * * * * 

■ Par. 13. Section 1.1248–1 is amended 

by adding a new sentence at the end of 

paragraph (a)(1) to read as follows: 

§ 1.1248–1 Treatment of gain from certain 

sales or exchanges of stock in certain 

foreign corporations. 

(a) * * * (1) * * * See also §§ 1.732– 

1(c)(2)(v) and 1.755–1(c)(2)(v) for rules 

governing the application of section 

1248 to partnership property in 

situations in which the basis of the 

property is increased or decreased 

under section 732 or 734(b). 

* * * * * 

■ Par. 14. Section 1.1250–1 is amended 

by revising the section heading and 

adding a new sentence at the end of 

paragraph (f) to read as follows: 

§ 1.1250–1 Gain from disposition of certain 

depreciable property. 

(f) * * * See also §§ 1.732–1(c)(2)(iii) 

and 1.755–1(c)(2)(iii) for rules governing 

the application of section 1250 to 

partnership property in situations in 

which the basis of the property is 

increased under section 732 or 734(b). 

* * * * * 

■ Par. 15. Section 1.1252–2 is amended 

by adding a new sentence at the end of 

paragraph (c)(2)(vii) to read as follows: 

§ 1.1252–2 Special rules. 

* * * * * 

(c) * * * 

(2) * * * 

(vii) * * * See also §§ 1.732– 

1(c)(2)(iii) and 1.755–1(c)(2)(iii) for rules 

governing the application of section 

1252 to partnership property in 

situations in which the basis of the 


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property is increased under section 732 

or 734(b). 

* * * * * 

■ Par. 16. Section 1.1254–5 is amended 

by revising the introductory text of 

paragraph (b)(1) to read as follows: 

§ 1.1254–5 Special rules for partnerships 

and their partners. 

* * * * * 

(b) Determination of gain treated as 

ordinary income under section 1254 

upon the disposition of natural resource 

recapture property by a partnership—(1) 

General rule. Upon a disposition of 

natural resource recapture property by a 

partnership, the amount treated as 

ordinary income under section 1254 is 

determined at the partner level. See also 

§§ 1.732–1(c)(2)(iii) and 1.755– 

1(c)(2)(iii) for rules governing the 

application of section 1254 to 

partnership property in certain 

situations. Each partner must recognize 

as ordinary income under section 1254 

the lesser of— 

* * * * * 

■ Par. 17. Section 1.6050K–1 is 

amended by revising paragraph (a)(4)(ii) 

and adding a new sentence after the 

third sentence of paragraph (c) 

introductory text to read as follows: 

§ 1.6050K–1 Returns relating to sales or 

exchanges of certain partnership interests. 

(a) * * * 

(4) * * * 

(ii) Section 751 property. For 

purposes of this section, the term 

‘‘section 751 property’’ means 

unrealized receivables, as defined in 

section 751(c) and the regulations, and 

inventory items, as defined in section 

751(d) and the regulations. 

* * * * * 

(c) * * * With respect to any 

statement required to be furnished to a 

transferor, the statement shall, in 

addition to the other information 

required, include the amount of any 

gain or loss attributable to section 751 

property that is required to be 

recognized pursuant to paragraph (a)(2) 

of § 1.751–1. * * * 

* * * * * 

■ Par. 18. For each section listed in the 

table, remove the language in the 

‘‘Remove’’ column and add in its place 

the language in the ‘‘Add’’ column as set 

forth below: 

Section Remove Add 

§ 1.704–3, paragraph (a)(6)(ii) ........................... § 1.743–1(b) or 1.751–1(a)(2) .......................... § 1.743–1(b), 1.751–1(a)(2), or 1.751–1(b). 

§ 1.751–1, paragraph (c)(4)(i) first and last sentences.sections 731, 736, 741, and 751 ..................... sections 731, 732, and 741 (but not for purposes of section 736). 

§ 1.751–1, paragraph (c)(4)(ii), first and last 

sentences.

sections 731, 736, 741, and 751 ..................... sections 731, 732, and 741 (but not for purposes of section 736). 

§ 1.751–1, paragraph (c)(4)(iii) first and last 

sentences.

sections 731, 736, 741, and 751 ..................... sections 731, 732, and 741 (but not for purposes of section 736). 

§ 1.751–1, paragraph (c)(4)(iv) first and last 

sentences.

sections 731, 736, 741, and 751 ..................... sections 731, 732, and 741 (but not for purposes of section 736). 

§ 1.751–1, paragraph (c)(4)(v) first and last 

sentences.

sections 731, 736, 741, and 751 ..................... sections 731, 732, and 741 (but not for purposes of section 736). 

§ 1.751–1, paragraph (c)(4)(vii) first and last 

sentences.

sections 731, 736, 741, and 751 ..................... sections 731, 732, and 741 (but not for purposes of section 736). 

§ 1.751–1, paragraph (c)(4)(viii) first and last 

sentences.

sections 731, 736, 741, and 751 ..................... sections 731, 732, and 741 (but not for purposes of section 736). 

§ 1.751–1, paragraph (c)(4)(ix) first and last 

sentences.

sections 731, 736, 741, and 751 ..................... sections 731, 732, and 741 (but not for purposes of section 736). 

§ 1.751–1, paragraph (d)(2)(i) last sentence ..... section 1221(1) ................................................ section 1221(a)(1). 

§ 1.751–1, paragraph (d)(2)(ii) second sentence section 1221(4) ................................................ section 1221(a)(4). 

§ 1.1245–1, paragraph (a) last sentence ........... see section 1245(b) and § 1.1245–4 ............... see section 1245(b), and §§ 1.732–1(c)(2)(iii), 

1.755–1(c)(2)(iii), and 1.1245–4. 

§ 1.1245–2, paragraph (c)(6)(i) .......................... 1245(b)(6)(B) .................................................... 1245(b)(5)(B). 

John Dalrymple, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. 2014–25487 Filed 10–31–14; 8:45 am] 

BILLING CODE 4830–01–P 


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