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proceeds from the sale with the broker-dealer as collateral and
deposited additional cash with the broker-dealer as further
collateral. The partnership was obligated to deliver identical
securities to the broker-dealer to close out the short sale.
On these facts, the Commissioner concluded that the short sale
created a partnership liability within the meaning of section 752,
citing Rev. Rul. 88-77, supra, for the proposition that a liability
under section 752 includes an obligation 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. The Commissioner reasoned that a short
sale creates such a liability inasmuch as: (1) A short sale
creates an obligation to return the borrowed securities, citing
Deputy v. du Pont, 308 U.S. 488, 497-498 (1940); and (2) the
partnership’s basis in its assets is increased by the amount of
cash received on the sale of the borrowed securities. See Rev.
Rul. 95-26, supra at 132. Accordingly, the Commissioner concluded
that the partners’ bases in their partnership interests were
increased under section 722 to reflect their shares of the
partnership’s liability under section 752.
Petitioner first asserts that section 752 is simply
inapplicable. In particular, petitioner maintains that the
substantial difference between Salina’s inside basis in its assets
and FPL’s outside basis in its partnership interest is dictated by
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