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exchange for stock. The Commissioner noted that Congress had
provided that a shareholder’s basis generally is not increased by
liabilities, the payment of which would give rise to a deduction,
except for liabilities the incurrence of which resulted in the
creation of, or an increase in, the basis of any property.10 The
Commissioner also found it significant that, in amending section
704(c) under the Deficit Reduction Act of 1984, Pub. L. 98-369,
sec. 71(a), 98 Stat. 494, Congress expressly rejected Rev. Rul. 60-
345, supra, stating in the legislative history that “accrued but
unpaid items should not be treated as partnership liabilities for
purposes of section 752.” On the basis of these factors, the
Commissioner interpreted section 752 as follows:
Under P’s method of accounting, P’s obligations to
pay amounts incurred for interest and services are not
deductible until paid. For purposes of section 752 of
the Code, the terms “liabilities of a partnership” and
“partnership liabilities” include an obligation only if
and to the extent that incurring the liability creates or
increases the basis to the partnership of any of the
partnership’s assets (including cash attributable to
borrowings), gives rise to an immediate deduction to the
partnership, or, under section 705(a)(2)(B), currently
decreases a partner’s basis in the partner’s partnership
interest. [Rev. Rul. 88-77, 1988-2 C.B. 129.]
10 Sec. 357(c) generally provides that a taxpayer who
transfers property to a corporation with liabilities in excess of
adjusted basis is considered to have realized a gain. Sec.
357(c)(3)(A) generally provides that, for purposes of a sec. 351
exchange, liabilities in excess of adjusted basis are excluded
from consideration if the liability would give rise to a
deduction or if it would be considered a distributive share or
guaranteed payment under sec. 736(a). Sec. 357(c)(3)(B) provides
that subparagraph (A) shall not apply to a liability to the
extent that the incurrence of the liability resulted in the
creation of, or an increase in, the basis of any property.
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