Reg. § 1.358-7 Transfers by partners and partnerships to corporations.
(a) Transfers by partners of partnership interests For purposes of section , a transfer of a partnership interest to a corporation is treated as a transfer of the partner's share of each of the partnership's assets and an assumption by the corporation of the partner's share of partnership liabilities (including section liabilities, as defined in of this section). See of this section.
(b) Transfers by partnerships If a corporation assumes a section liability from a partnership in an exchange to which section applies, then, for purposes of applying section (determination of basis of partner's interest) and , any reduction, under section , in the partnership's basis in corporate stock received in the transaction is treated as an expenditure of the partnership described in section . See of this section. This expenditure must be allocated among the partners in accordance with section and (c) and . If a partner's share of the reduction, under section , in the partnership's basis in corporate stock exceeds the partner's basis in the partnership interest, then the partner recognizes gain equal to the excess, which is treated as gain from the sale or exchange of a partnership interest. This paragraph does not apply to the extent that applies to the assumption of the liability by the corporation.
(c) Assumption of section 358(h) liability by partnership followed by transfer of partnership interest or partnership property to a corporation—trade or business exception Where a partnership assumes a section liability from a partner and, subsequently, the partner transfers all or part of the partner's partnership interest to a corporation in an exchange to which section applies, then, for purposes of applying section , the section liability is treated as associated only with the contribution made to the partnership by that partner. See of this section. Similar rules apply where a partnership assumes a section liability of a partner and a corporation subsequently assumes that section liability from the partnership in an exchange to which section applies.
(d) Section 358(h) liabilities defined For purposes of this section, section liabilities are liabilities described in section .
(e) Examples The following examples illustrate the provisions of this section. Assume, for purposes of these examples, that the obligation assumed by the corporation does not reduce the shareholder's basis in the corporate stock under section . The examples are as follows:
Example 1. Transfer of partnership property to corporation. In 2004, in an exchange to which section applies, PRS, a cash basis taxpayer, transfers $2,000,000 cash to Corporation X, also a cash basis taxpayer, in exchange for Corporation X shares and the assumption by Corporation X of $1,000,000 of accounts payable incurred by PRS. At the time of the exchange, PRS has two partners, A, a 90% partner, who has a $2,000,000 basis in the PRS interest, and B, a 10% partner, who has a $50,000 basis in the PRS interest. Assume that, under section , PRS's basis in the Corporation X stock is reduced by the accounts payable assumed by Corporation X ($1,000,000). Under of this section, A's and B's bases in PRS must be reduced, but not below zero, by their respective shares of the section basis reduction. If either partner's share of the section basis reduction exceeds the partner's basis in the partnership interest, then the partner recognizes gain equal to the excess. A's share of the section basis reduction is $900,000 (90% of $1,000,000). Therefore, A's basis in the PRS interest is reduced to $1,100,000 ($2,000,000 − $900,000). B's share of the section basis reduction is $100,000 (10% of $1,000,000). Because B's share of the section basis reduction ($100,000) exceeds B's basis in the PRS interest ($50,000), B's basis in the PRS interest is reduced to $0 and B recognizes $50,000 of gain. This gain is treated as gain from the sale of the PRS interest.
Example 2. Transfer of partnership interest to corporation. In 2004, A contributes undeveloped land with a value and basis of $4,000,000 in exchange for a 50% interest in PRS and an assumption by PRS of $2,000,000 of pension liabilities from a separate business that A conducts. A's basis in the PRS interest immediately after the contribution is A's basis in the land, $4,000,000, unreduced by the amount of the pension liabilities. PRS develops the land as a landfill. Before PRS has economically performed with respect to the pension liabilities, A transfers A's interest in PRS to Corporation X, in an exchange to which section applies. At the time of the exchange, the value of A's PRS interest is $2,000,000, A's basis in PRS is $4,000,000, and A has no share of partnership liabilities other than the pension liabilities. For purposes of applying section , the transfer of the PRS interest to Corporation X is treated as a transfer to Corporation X of A's share of PRS assets and an assumption by Corporation X of A's share of the pension liabilities of PRS ($2,000,000). Because the pension liabilities were not assumed by PRS from A in an exchange in which the trade or business associated with the liability was transferred to PRS, the transfer of the PRS interest to Corporation X is not excepted from section under section . See of this section. Under section , A's basis in the Corporation X stock is reduced by the $2,000,000 of pension liabilities.
(f) Effective date This section applies to assumptions of liabilities by a corporation occurring on or after June 24, 2003.
[T.D. 9207, 70 FR 30341, May 26, 2005]