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SEC. 732(b). Distributions in Liquidation.--
The basis of property (other than money) distributed
by a partnership to a partner in liquidation of the
partner’s interest shall be an amount equal to the
adjusted basis of such partner’s interest in the
partnership reduced by any money distributed in the same
transaction.
Pursuant to sections 732 and 723, upon the recontribution of the
property back to the partnership, the partnership’s substituted
basis in the property is equal to the adjusted basis of the
property in the hands of the contributing partner.
Based upon these provisions, Salina concluded that its assets
were deemed distributed to FPL, Caraville, and Pallico, and,
immediately thereafter, deemed recontributed to the partnership
with bases equal to the partners’ outside bases in the partnership.
Respondent determined that Salina is not entitled to rely upon the
provisions outlined above, citing several alternative grounds.
1. Economic Substance
Respondent first contends that FPL’s investment in Salina
during the period December 28 through 31, 1992, should be
disregarded for tax purposes as a sham in substance. In so
arguing, respondent asserts that the Court should segregate FPL’s
investment in Salina into two parts: (1) FPL’s investment in
Salina during the period December 28 through 31, 1992, and (2)
FPL’s investment in Salina during the period January 1, 1993,
through the dissolution and liquidation of the partnership in
November 1994. Although respondent concedes that FPL had a valid
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