DEEMED DISTRIBUTION IS TREATED AS AN ADVANCE OR DRAWING OF MONEY TAKEN INTO ACCOUNT AT END OF PARTNERSHIP'S TAX YEAR.

Rev. Rul. 94-4

ISSUE

If a deemed distribution of money under section 752(b) of the Internal Revenue Code occurs as a result of a decrease in a partner's share of the liabilities of a partnership, is the deemed distribution taken into account at the time of the distribution or at the end of the partnership taxable year?

LAW

Under section 752(b), a decrease in a partner's share of partnership liabilities is considered a distribution of money to the partner by the partnership. The partner will recognize gain under section 731(a)(1) if the distribution of money exceeds the adjusted basis of the partner's interest immediately before the distribution.

Section 1.731-1(a)(1)(ii) of the Income Tax Regulations provides that for purposes of sections 731 and 705, advances of drawings of money or property against a partner's distributive share of income are treated as current distributions made on the last day of the partnership taxable year with respect to that partner.

Rev. Rul. 92-97, 1992-2 C.B. 124, treats a deemed distribution of money to a partner resulting from a cancellation of debt as an advance or drawing under section 1.731-1(a)(1)(ii) against that partner's distributive share of cancellation of indebtedness income.

HOLDING

A deemed distribution of money under section 752(b) resulting from a decrease in a partner's share of the liabilities of a partnership is treated as an advance or drawing of money under section 1.731-1(a)(1)(ii) to the extent of the partner's distributive share of income for the partnership taxable year. An amount treated as an advance or drawing of money is taken into account at the end of the partnership taxable year. A deemed distribution of money resulting from a cancellation of debt may qualify for advance or drawing treatment under this revenue ruling and under Rev. Rul. 92- 97.

DRAFTING INFORMATION

The principal author of this revenue ruling is Ronald M. Gootzeit of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Ronald M. Gootzeit at (202) 622-3080 (not a toll-free call).