Opinion ID: 207841
Heading Depth: 4
Heading Rank: 3

Heading: Revenue Rulings and Treasury Regulations.

Text: Six months after La Rue was decided by the Tax Court, on September 19, 1988, the IRS issued Revenue Ruling 88-77, 1988-2 C.B. 128, 1988 WL 546796, which defined liability under Section 752. The ruling states: For purposes of section 752 of the Code, the terms ‘liabilities of a partnership’ and ‘partnership liabilities’ include an obligation only if and to the extent that incurring the 15 liability creates or increases the basis to the partnership of any of the partnership’s assets (including cash attributable to borrowings), gives rise to any immediate deduction to the partnership, or, under section 705(a)(2)(B), currently decreases a partner’s basis in the partner’s partnership interest. Rev. Rul. 88-77. A few months after issuing Revenue Ruling 88-77, the Commissioner issued a temporary regulation containing a similar definition of “liability” under Section 752: [U]nder section 752, an obligation is a liability of the obligor for purposes of [S]ection 752 and the regulations thereunder to the extent, but only to the extent, that incurring or holding such obligation gives rise to (1) The creation of, or an increase in, the basis of any property owned by the obligor (including cash attributable to borrowings); (2) A deduction that is taken into account in computing the taxable income of the obligor; or (3) An expenditure that is not deductible in computing the obligor’s taxable income and is not properly chargeable to capital. Temp. Treas. Reg. § 1.752-1T(g), 1989-1 C.B. 180, 192, 53 Fed. Reg. 53,140, 53,150-51 (Dec. 30, 1988). However, the final regulations adopted in 1991 omitted any definition of “liability.” See 1992-1 C.B. 218, 56 Fed. Reg. 66,348 (Dec. 23, 1991). According to the IRS, “[t]his change was made only for the purpose of simplification and not to change the substance of the regulation.” IRS Field Service Advisory, 1997 WL 33313960 (Nov. 21, 1997). Thereafter, in 1995, the Commissioner issued Revenue Ruling 95-26, which addressed whether a partnership’s short sale of securities creates a liability within the meaning of Section 752. Rev. Rul. 95-26, 1995-1 C.B. 131. The revenue ruling concludes that a liability under Section 752 includes an obligation to the extent that incurring the liability creates or increases the basis to the partnership of any of the partnership’s assets, including cash attributable to borrowings. The Commissioner reasoned that a short sale creates such a liability inasmuch as (1) the partnership’s basis in its assets is increased by the amount of cash received on the sale of the borrowed securities, and (2) a short sale creates an obligation to return the borrowed securities. See Rev. Rul. 95-26, 1995-1 C.B. at 132. In this respect, the Commissioner relied on Revenue Ruling 88-77. Id. Accordingly, for those partners directly affected by Revenue Ruling 95-26, the Commissioner concluded that the partners’ bases in their partnership interests were increased under Section 722 to reflect their shares of the partnership’s liability under Section 752.20 20 Revenue Ruling 95-45 held that a corporation’s assumption of its shareholders’ “obligation to deliver replacement securities to close out a short-sale constitutes the assumption of a liability for purposes of [S]ections 357 and 358 of the Code.” Rev. Rul. 95-45, 1995-1 C.B. 16