NO MINIMUM GAIN CHARGEBACK IS REQUIRED WHEN PARTNERSHIP TERMINATES ON SALE OF 50-PERCENT INTEREST.

Rev. Rul. 93-90

ISSUE

Is there a minimum gain chargeback under section 1.704-2(f) of the Income Tax Regulations because of a partnership termination pursuant to section 708(b)(1)(B) of the Internal Revenue Code.

FACTS

Partnership P has two equal partners, A and B. P has been operating for several years and has nonrecourse liabilities subject to the allocation rules of section 1.704-2 of the regulations. P also has partnership minimum gain. On January 1, 1993, B sells B's interest to C, and P terminates under section 708(b)(1)(B) of the Code.

LAW AND ANALYSIS

Section 708(b)(1)(B) of the Code provides that a partnership terminates if within a 12-month period there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits.

Section 1.708-1(b)(1)(iv) of the regulations provides that if a partnership terminates by a sale or exchange of an interest, the following is deemed to occur: The partnership distributes its properties to the purchaser and the other remaining partners in proportion to their respective interests in the partnership properties; and, immediately thereafter, the purchaser and the other remaining partners contribute the properties to a new partnership.

Section 1.1001-2(a) of the regulations provides that to the extent a nonrecourse liability exceeds the adjusted basis of the property it encumbers, a disposition of that property will generate gain at least equal to that excess. When the liability encumbers partnership property, section 1.704-2(b)(2) defines the excess of the liability over the property's book basis as partnership minimum gain.

Section 1.704-2(f)(1) of the regulations provides that if there is a net decrease in partnership minimum gain for a partnership taxable year, whether from a sale of property or otherwise, each partner must be allocated items of partnership income and gain for that year equal to that partner's share of the net decrease in partnership minimum gain (the minimum gain chargeback requirement).

Section 1.704-2(d)(4) of the regulations provides that if there is a decrease in partnership minimum gain because the partners capital accounts are increased pursuant to section 1.704- 1(b)(2)(iv)(d), (f), or (r), there will be no minimum gain chargeback arising solely from the revaluation. Section 1.704-2(f)(5) provides that the Commissioner may, by revenue ruling, provide additional exceptions to the minimum gain chargeback requirement.

Section 1.704-1(b)(2)(iv)(l) of the regulations provides that if the transfer of a partnership interest terminates the partnership under section 708(b)(1)(B) of the Code, the transferee partner's capital account will be adjusted in accordance with section 1.704- 1(b)(2)(iv)(e).

To satisfy the capital account maintenance rules of section 1.704-1(b)(2)(iv) of the regulations, the capital account adjustments must meet certain requirements. Section 1.704-1(b)(2)(iv)(e) requires that a partner's capital account be decreased by the fair market value of property distributed by the partnership to the partner. To satisfy this requirement, the capital accounts of the partners first must be adjusted to reflect the manner that the unrealized income, gain, loss, and deduction inherent in the property (not previously reflected in the capital accounts) would be allocated among the partners if there were a taxable disposition of the property for the fair market value of the property (taking section 7701(g) of the Code into account) on the date of distribution.

The sale of B's interest in P to C caused P to terminate under section 708(b)(1)(B) of the Code. Upon the termination, P is deemed to have distributed to each of A and C one-half the partnership property; immediately thereafter A and C are deemed to have each contributed the property to a new partnership.

Pursuant to section 1.704-1(b)(2)(iv)(e) of the regulations, the book capital accounts of A and C are each adjusted to reflect the manner in which the partnership gain would be shared if the partnership property were sold for its fair market value immediately prior to P's termination. After revaluation, P's partnership minimum gain is reduced to zero, which would ordinarily trigger a minimum gain chargeback.

Nevertheless, under section 1.704-2(f)(5), no minimum gain chargeback is required because when a partnership terminates under section 708(b)(1)(B) of the Code, minimum gain is accounted for by the partners without a minimum gain chargeback. B's share of the minimum gain is taken into account by B upon the sale of the partnership interest; B's amount realized reflects the fair market value of the encumbered property (taking into account section 7701(g)), and, therefore, gain or loss recognized by B includes gain equal to B's share of the partnership minimum gain. A's share of the minimum gain is taken into account upon the deemed distribution of the partnership assets to A and C and their deemed recontribution to the partnership. On the deemed distribution, the basis of the assets in A's hands reflects A's basis in the partnership (section 732(b)), and on the deemed recontribution, the difference between the assets' fair market value and basis is taken into account under section 704(c) and section 1.752-3 of the regulations.

HOLDING

There is no minimum gain chargeback under section 1.704-2(f) of the regulations because of a partnership termination pursuant to section 708(b)(1)(B) of the Code.

DRAFTING INFORMATION

The principal author of this revenue ruling is David Edquist of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Mr. Edquist on (202) 622-3050 (not a toll-free call).