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The Temporary Regulation contains a number of exceptions to
this general rule. One exception (the Loss Restoration
Exception) states as follows:
(6) Exception to restoration rule for selling member
that ceases to be a member. If a selling member of property
for which loss has been deferred ceases to be a member when
the property is still owned by another member, then, for
purposes of this section, sec. 1.1502-13(f)(1)(iii) shall
not apply to restore that deferred loss and that loss shall
never be restored to the selling member. [Sec. 1.267(f)-
1(T)(c)(6), Temporary Income Tax Regs., 49 Fed. Reg. 46998
(Nov. 30, 1984).]
If the Loss Restoration Exception applies, then the
Temporary Regulation provides a basis adjustment (the Basis Shift
Exception) to the purchasing member as follows:
(7) Basis adjustment and holding period. If paragraph
(c)(6) of this section precludes a restoration for property,
then the following rules apply:
(i) On the date the selling member ceases to be a
member, the owning member's basis in the property shall
be increased by the amount of the selling member's
unrestored deferred loss at the time it ceased to be a
member * * *. [Sec. 1.267(f)-1(T)(c)(7), Temporary
Income Tax Regs., 49 Fed. Reg. 46998 (Nov. 30, 1984).]
The Temporary Regulation remained in force until superseded
by the final regulation, section 1.267(f)-1, Income Tax Regs.
(the Final Regulation). The Final Regulation is prospective only
and applies with respect to transactions occurring in years
beginning on or after July 12, 1995. See T.D. 8597, 1995-2 C.B.
147, 160-161. Under the Final Regulation, consolidated return
principles apply to restore the deferred loss to the seller when
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