Kligfeld Holdings, Kligfeld Corporation, Tax Matters Partner - Page 8

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          Kligfeld conceivably ended up with an outside basis in Holdings 1           
          of just over $10.5 million, which wasn’t reduced when Holdings 1            
          closed the short sale.11  Therefore, when Kligfeld transferred              
          his partnership interest to Corporation, he also might have                 
          transferred his high basis and in return, received shares of                
          Corporation stock with the same high basis.                                 
               When a new partner acquires a partnership interest, he                 
          typically pays fair market value for that interest, which can               
          result in discrepancies between his outside basis and his share             
          of the partnership’s inside basis.  To help balance out those               
          discrepancies, section 754 allows a partnership to elect to                 
          adjust the inside basis of partnership assets to reflect the new            

          the obligation shouldn’t be treated as a liability for purposes             
          of basis calculation.  Section 1.752-6(a), Income Tax Regs.,                
          which became effective on May 26, 2005, retroactively changed               
          this line of reasoning (or, perhaps, made clear its original                
          weakness).  The regulation states that, for any contingent                  
          liability assumed by a partnership between October 18, 1999, and            
          June 24, 2003, the contributing partner must take into                      
          consideration the value of the contingent liability as of the               
          date of exchange when determining outside basis.  The validity of           
          the regulation’s retroactive application has been a matter of               
          some controversy.  See, e.g., Klamath Strategic Inv. Fund LLC v.            
          United States, 440 F. Supp. 2d 608 (E.D. Tex. 2006).                        
               11 Since the obligation wasn’t treated as a liability when             
          it was transferred to the partnership, the fulfillment of that              
          obligation wasn’t treated as a decrease in Kligfeld’s share of              
          partnership liabilities, which would have reduced his outside               
          basis.  See sec. 752(b).                                                    

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