- 8 -
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
10(...continued)
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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Last modified: November 10, 2007